A common misconception among home buyers is that you’ll need 20 percent down in order to qualify for a home mortgage. This is untrue. You don’t need to make a 20 percent downpayment.
In fact, not only do you not need 20 percent down, but no money down mortgages are still available to millions of U.S. buyers.
Today’s home buyers have plenty of choices when 20 percent down is not an option.
What Is A Downpayment?
Let’s start with the differences between downpayment and earnest money deposit.
Earnest money is a deposit made on the home you want to buy. It’s generally paid at the time an offer is being submitted as a sign that you are earnest (i.e. serious) about wanting to buy the home.
A downpayment, on the other hand, is a percentage of the sales price that a lender requires the home buyer to pay from reserves. Downpayments can come from a bank account, a stock fund, an inheritance, or a retirement portfolio.
Downpayments can also come from a family member in the form of a gift.
Downpayment requirements will vary based on your loan. Loans for a primary home will have different downpayment requirements as compared to secondary or investment home.
The type of loan you choose can affect your downpayment, too. Conventional, FHA, VA, and jumbo loans each feature varying downpayment minimums, and the property type of your home will play a role, too.
Mortgage Options With Less Than 20% Down
Downpayment for Conventional Loans: 5%
Conventional loans require buyers to make a minimum 5 percent downpayment on a home. Because this is a conventional loan, and because the downpayment is less than twenty percent, private mortgage insurance (PMI) will be required.
PMI can be paid monthly with the mortgage; in a lump-sum at the time of closing; or “built-in” to your mortgage rate (LPMI).
In general, the smaller your downpayment and lower your credit score, the higher your PMI rate will be.
Downpayment for FHA Mortgage Loans: 3.5%
Backed by the government, FHA loans have been popular with U.S. buyers since their launch in 1934.
FHA loans require just a 3.5 percent downpayment and are often more appealing than comparable conventional loans because of their less stringent route through underwriting. FHA loans are more forgiving with respect to credit scores, income and assets.
The FHA loan’s flexible underwriting standards make it an appealing financing option — especially for first time home buyers.
Downpayment for FHA $100 Down Programs: $100
Available to most U.S. buyers, the FHA features a special "$100 down” loan with accompanying low mortgage rates.
Via the program, buyers can grab HUD-owned homes at steep discounts. In order to use the $100 down program, buyers must purchase a home which was previously financed via the FHA and which has since moved into foreclosure.
Your real estate agent or lender can help you to identify eligible U.S. homes.
Downpayment for VA Mortgage Loans: No Downpayment
The VA loan is another government-backed loan. Guaranteed by the Department of Veterans Affairs, it’s a program allowing for no downpayment whatsoever.
To be eligible for a VA loan, you must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are eligible as well. VA underwriting is very similar to FHA underwriting in terms of leniency.
However, VA loans stand apart because they require zero downpayment and no mortgage insurance whatsoever.
Downpayment for USDA Loans: No Downpayment
The U.S. Department of Agriculture (USDA) also offers a zero-downpayment mortgage.
The USDA’s Rural Housing loan is meant to help people buy property into non-urban areas nationwide. Most “modest homes” are eligible and homeowners are generally restricted to a “modest income”. USDA loans are available in all 50 states and underwriting guidelines are similar those with the FHA and VA.
There is a small mortgage insurance premium associated with USDA loans which less than with a comparable and higher than a comparable VA loan.
How Much Downpayment Should I Make?
When trying to determine how much to put down on a home, in addition to the minimum downpayment requirements, it’s important to understand how your downpayment will affect your monthly mortgage payment and obligation.
Conventional wisdom says that the bigger downpayment you can make, the better. This results in a smaller monthly payment and less money owned. However, wiping out your savings or retirement account to make a big downpayment is rarely a wise choice.
Do your homework on downpayment options. Compare today’s mortgage rates and mortgage programs and see for what program’s you’re eligible. At today’s low rates, there are a lot of terrific choices.