Down payment options for purchasing a new home vary by loan program. Here's an overview of the most popular mortgage types and their minimum down payment qualifications. I've also included information on the mortgage insurance that is or isn't involved in each program because I believe down payment shouldn't be the only factor when making a mortgage decision.
Conforming (Conventional) MortgagesConforming loans are the most popular loans and the term is often mistakenly used interchangeably with conventional loans (all conforming loans are conventional, but not all conventional loans are conforming). These loans conform to the guidelines of Fannie Mae and Freddie Mac - two mortgage giants. By following conforming mortgage guidelines, lenders are able to sell their loans on the secondary market, which is advantageous to the lender. Read this article to understand why a lender's ability to sell mortgages benefits everyone: Why are home mortgages sold?
Among the most important guidelines Fannie Mae and Freddie Mac set is the minimum 3% down payment (available for first time homebuyers only).
Conforming loans with less than 20% down payment require private mortgage insurance (PMI). PMI is extra insurance that protects the lender in the event of a default and is automatically canceled when the homeowner has 22% equity in the home on conforming loans. The most common form of PMI is monthly, but there are also one time fee and lender-paid PMI options. For more on PMI, read this article: What is mortgage insurance and why do I have to pay it?
The Down Payment Sweet SpotConforming loans have a major benefit for people who are able to come up with a larger down payment. At 20% down payment, no mortgage insurance is required on conforming loans. Most people who are able to put down 20% or more on a home purchase choose conforming loans for this reason.
FHA MortgagesFHA loans are insured by the government and require just 3.5% down payment. This is one of the reasons they remain a popular mortgage option for first time home buyers. This lower down payment requirement is not without its downside, however.
Mortgage Insurance Premium (MIP)FHA loans require two different types of mortgage insurance premium (MIP). The first type is called upfront mortgage insurance premium (UFMIP) and is required on all FHA loans. The current UFMIP fee is 1.75% of the loan amount. UFMIP is typically financed, meaning it is added on to the loan amount rather than paid by the borrower at the time of purchase.
The second type is called monthly mortgage insurance premium. Monthly MIP amounts vary depending on the down payment and loan term. FHA's monthly MIP payments are set by down payment amount and loan term. Monthly MIP is required for the life of the loan if the down payment is less than 10% or for a minimum of 11 years if the down payment is more than 10%.
VA MortgagesVA loans exist to help veterans, service members and surviving spouses obtain favorable mortgage terms. They are partially guaranteed by the government, which allows lenders to offer them with 0% down payment. This makes them a very attractive option for those who qualify. VA loans do not have any monthly PMI or MIP, which is another huge benefit.
VA Funding FeeVA mortgages do have an upfront fee, somewhat similar to FHA's UFMIP. It is called a funding fee and just like UFMIP, it may be financed rather than paid at the time of closing. The funding fee for a home purchase currently ranges from 1.25-3.30% depending on down payment, type of service and whether or not the borrower has used VA benefits in the past. It is important to note that qualifying disabled veterans and surviving spouses are exempt from any funding fees.
Jumbo MortgagesJumbo mortgages will vary greatly from lender to lender. A jumbo mortgage is one that has a higher loan amount than the conforming limits will allow. Since they do not follow conforming, FHA or VA guidelines, lenders make their own rules when it comes to jumbo loans. The lowest down payment option I have seen recently for a jumbo mortgage is 10% down payment, which my company currently offers for qualified borrowers.
USDA MortgagesThe USDA loan program was developed to help people in rural areas purchase homes at more favorable terms. USDA stands for United States Department of Agriculture (yes, that USDA). The loans have strict limits on household income and the property must be located in an eligible rural area. If both borrower and property meet eligibility requirements, USDA loans offer 0% down payment. They do have an upfront fee called a guarantee fee, which may be financed if the homeowner wishes. They also have monthly mortgage insurance, but the payments are typically lower than FHA and conforming mortgage insurance payments.
One Final Note - Down Payment Assistance ProgramsThey aren't necessarily separate programs, but it is important to know that most areas of the country have down payment assistance programs.
Down payment assistance programs come in too many varieties to cover here. Some require repayment, others do not. Some are actually a second lien on the property, others are simply a grant. Some have payments and interest, others have neither. These programs vary greatly by region, so it's best to do some online research on the topic or, better yet, call a local professional. They can walk you through the ins and outs of options available in your area.
I hope that provides a little clarity on the subject of down payments. Thanks for reading my blog! If you found this information helpful, please share it with others.