A question we get asked by most first time home buyers is…What is my minimum down payment? Many ask if they truly need 20% down or if they qualify for low-down-payment options (like 3% or 3.5% 0r 5%). The information below all relates to the purchase of a Single Family Primary Residence.
Down payment requirements vary based on on a number of factors. A key factor is the type of loan. And a discussion of down payments also requires a discussion of mortgage insurance.
For Conventional Loans (Fannie Mae and Freddie Mac) a 20% down payment is often called the “gold standard” because it is the threshold where lenders stop requiring Private Mortgage Insurance (PMI), which is an extra monthly cost that protects the lender—not you—if you default. If they have to foreclose and then sell the home, the mortgage insurance helps to insure they will recoup the value of the mortgage.
With a conventional loan, First Time Home Buyers can put down as little as 3%. (A first time home buyer is someone who has never owned a home…OR…has not owned a home in the past 3 years). Other borrowers must put down at least 5%. The cost for Private Mortgage Insurance is larger for smaller down payments. So the most expensive mortgage insurance is for a 3% down payment. With a 5% down payment, it is a bit less expensive. With a 10% down payment, the cost drops more, and with a 15% down payment, the cost is lowest. The cost of private mortgage insurance is also tied to your credit score, and a loan with 2 borrowers who both have great credit will often receive a better quote than a loan with just 1 borrower. With 20% down or more, you will not need mortgage insurance.
Jumbo Loans are loans larger than the conventional conforming loan limit of $832,750. Jumbo loans are riskier for lenders to make, because the loan sizes are so large, and so the options for a smaller than 20% down payment exist but are more limited. We do have good options with a 10.01% down payment. Call us for more details.
An FHA loan will require a minimum down payment of 3.5% for borrowers with a credit score of 580 or higher. FHA loans also require 2 types of mortgage insurance. There is an Up Front Mortgage Insurance Premium (UFMIP) which is 1.75% of the loan amount, and can be financed into the loan. There is also a required monthly mortgage insurance premiums (MIP) which varies whether your down payment is 3.5%, or 5%, or 10% or greater.
VA Loans do not require a down payment, but there is a VA Funding Fee (which is comparable to a single premium mortgage insurance payment) The VA Funding Fee ranges in one-time cost from 0.5% to 3.3% of the total loan amount. The amount of this fee depends on loan type, down payment, and usage (first-time vs. subsequent). The fee is typically 2.15% for first-time use (<5% down) and 3.3% for subsequent use (<5% down). Exemptions apply for veterans with service-connected disabilities.
Which is the right choice for you? Even with the cost of the VA Funding Fee, if you can qualify for a VA loan it is often the best choice. If you aren’t a veteran, and have great credit, a conventional loan is usually the best option. And an FHA loan can be the best choice for borrowers who do not meet the stricter requirements of conventional mortgages.