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Mortgage Down Payment
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Mortgage down payment is a percentage of the purchase price homebuyers pay at closing.
Percentage varies: 3.5% (FHA loans), 5% to 20% (Conventional loans).
Less than 20% down payment requires mortgage insurance.
Source can be from buyer’s funds OR a gift: someone pays on their behalf.
It also can be a DPA (Down Payment Assistance program).
USDA & VA loans require ZERO down & NO mortgage insurance.
Down payment is one giant step on home buying process that you need to consider very early in the mix of buying your house process.
Sellers can contribute up to 6% in closing costs, which can free up the homebuyer’s funds to be used towards down payment
I am a real estate broker, based in Atlanta, Georgia and I will share some of my top coveted tips about down payment that can put your foot inside your new home’s door.
You may be aware that in order for you to put that piece of Americana to your name, you will need to come up with some kind of payment up front… or ‘a down payment.’
Well, please read on that there may be a way that you can put your foot in the door without any money down.
No, this is not a gimmick… And of course I am not talking about VA warranty loans nor USDA loans which should be said, also do not require any down payment at all (for those who will qualify)
On the other hand, unfortunately, this will not happen to everybody and for all locations and it is not available all the time either. Please read on, let me elaborate it because chances are you will qualify for a down payment assistance (DPA).
If you meet some criteria, there are many areas where you can qualify for down payment assistance (DPA) and/or some grants that you can use to cover part or, sometimes, up to 100% of your down payment without the need that you come up with the money from your pocket.
These programs are available all over the country and in all different levels of the government: Cities, counties, states and federal.
They all require some diligence in digging around, call the proper places and people – but you can see from the examples I show on my article “grants” just below, on this page - it can bring you a well-worth-your-time amount of money towards the purchase of your home.
Mortgage Down Payment
As already stated above, mortgage down payment – is a percentage of the purchase price – which the home buyer is expected – well, to put down out of his/her funds, at closing as part of your home buying process.
The percentage required for you down payment will vary – typically it will be some 3.5%, 5% or 20%. It is kind of odd, but there is no incentive or advantage for any other percentage in between.
I hope you are already pretty advanced on your “home loan application” – or you soon will be in your way.
Facing the financial side is one of the earliest steps I recommend that you should cover right when you start planning to buy a house.
In any case, when you receive your approval, the mortgage loan officer that you will be working with will give a “pre-approval letter” telling you and the world that you have been pre-approved for a mortgage loan and how much you qualify for.
Although you not completely approved – AND Loan Officers will give a list of what they need you to do (and what not to do) until you actually can close, the pre-qual letter gives some assurances to the seller that you are serious and you have started your financing process.
I cannot over emphasize how important the financing process is!
This letter will also say which kind of loan it is going to be: FHA or conventional loan.
It also can be a VA home loan if you are a veteran. In which case, you may qualify for a no-money down purchase.
Lastly, if you are buying a house in a rural area, it can be a USDA home loan which also can be a zero-down loan.
FHA - Federal Housing Authority
– 3.5% Down Mortgage Loan
Who is this program for?
FHA Mortgage Loan is a program designed to help low-to-mid-income (LMI) homebuyers and it is a natural choice for most first time home buyers.
Often times FHA Loan borrowers are challenged either by their low savings or low credit scores …or both
FHA Loans are designed to accommodate these challenges
Home Purchase will be for primary residence
FHA mortgage loans accomplish this mission with a few major incentives:I) Down payment of only 3.5% - which is a bench mark for low down payment
II) They offer more lenience on the borrower’s credit history
III) They offer higher debt-to-income ratio (DTI): How much records show that you owe divided by how money you make
IV) They require lower Credit Score
V) Down Payment can be a gift
VI) Or a Down Payment Assistance (DPA)
FHA loans are mortgages that are regulated and insured (backed) by the Federal Housing Administration (FHA).
The FHA doesn't lend the money directly, but rather through private lenders.
As it says above – FHA will insure the loan; they serve as ‘insurer’ for the mortgage loan.
FHA insures the lender. In case the homebuyer come to default in the loan, the ‘insurance’ will pay the lender directly for the amount in default.
FHA loans are very popular with lenders: You can find mortgage companies, banks and credit unions all across the USA eager to make this type of mortgage.
And it is, in part, due to the facts that they require low down payments (3.5%) and lenient credit requirements – as indicated above.
There is more scrutiny of the conditions of the house itself like the age of the roof, conditions of the flooring – it has to be in ‘move in’ determined by an FHA approved home inspector.
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FHA 203K Rehab Mortgage Loan
If the house needs a reasonable number of repairs, there is another possibility that could allow an additional amount – beyond the house purchased – to be added to the same mortgage loan.
The additional dollars will go to pay for the repairs – after closing!
It is like two loans in one pop.
It is called FHA 203K. I find it to be a lot of bureaucracy, but it works!
FHA Mortgage Loans Fees
FHA mortgage loans carry two fees:
I) Upfront Fee Mortgage Insurance Premium (UFMIP) of 1.75% on the total amount of the loan. But is wrapped into the loan, so you do not have to come up that portion upfront
II) They also require that the borrower pay an annual loan insurance called Mortgage Insurance Premium (MIP). Currently (March 2024) it is set at .55% of the total amount of the loan.
It is then divided by 12 – and that amount is added to the borrower’s monthly payment. And paid along the mortgage payments.
NOTICE: None of the moneys paid for these fees will count towards the home purchase price …actually they are addition to the purchase price.
MIP will NOT be waived as long it is backed by FHA.
Homeowner will have to make a refinance to a conventional loan when home ‘loan to value’ (LTV) comes to 78% - with a combination of payments + home value appreciation
In other words, the initial FHA loan will have to be paid in full and taken out of the government guarantee via a ‘conventional loan.’
Please see article on “5% Down Conventional with Insurance” below
These all being equal, you can put your foot in the door with as little as 3.5% down payment of the purchase price if you get approved for an FHA loan.
Reasons For Mortgage Insurance Premium
The Mortgage Insurance Premium (MIP) imposed by FHA is because banks, mortgage loan companies AND the government are NOT in the market to be ‘home owners.’
If someone defaults on their mortgage payments, the loan must be ‘foreclosed’ – which literally means ‘fore’ – earlier, before it should; ‘closed’ – finished, terminated.
In other words, the rights to the house are repossessed and returned to the lender.
It is believed that if a house has an equity of 20% or higher, it will be easy [or easier] to sell the house quickly for around 80% of its value or there abouts.
3.5% down payment is a longways until you get to 20 equity – therefore the Mortgage Insurance Premium will insure that gap to the system.
FHA insures the loans giving confidence to the lenders and investors that they will always be made whole in their money should a homebuyer default.
The certainty brought by the FHA insurance keeps the market stable and countless of folks became homeowners all across the USA every year!
In my mind FHA fees make the loan a tad bit more expensive – however it gives you a foot in the homeownership to a fix rate for 30 years!!!
If you compare to rent which goes up every year, there no comparison that buying a home via FHA is a far superior deal!
Pro Tips:
Tip: Down Payment From A Gift
FHA will accept that a bona fide cash gift to be used as down payment (or part of it).
It has to be a true gift. It cannot be a ‘disguised loan’ which the homebuyer has to pay later and bring hardship to the normal situation of pay for the home.
Talk with your loan officer about it early on, so not to have hiccups when you come to closing time.
Tip: Seasoning
The source of your down payment also cannot be a sudden occurrence that a large amount of cash ‘magically appears’ in your bank account…
It has to appear in at least 3 consecutive months in you bank statements – prior to the loan application.
Tip: Seller Can Contribute Up To 6% In closing Costs
On an FHA loan, the seller can contribute with up to 6% in closing costs, thus freeing the buyer’s own funds to apply to the down payment
FHA Loan With 10% Down Payment
Who is the FHA Loan With 10% Down Payment for?
This program is designed for homebuyers who have credit score between 579 and 500
Home Purchase will be for primary residence
And, can afford the higher 10% down payment
Which can come from their own funds, a bone fide gift, a down payment assistance (DPA) or any combination of the above
TIP: On the upside, this FHA program does allow for the Mortgage Interest Premium to be remove at some point, typically around +/- 80% of loan-to-value (LTV)
You’ll need to come up with a minimum of 3.5% to put down as part of your FHA loan qualification. (Other requirements still will apply)
Actually, as I have already discussed elsewhere in this site/blog – one of the important features of the FHA Loan programs it that they are much more lenient on their credit requirements.
Homebuyers with FICO® as low as 580 most certainly will qualify! For a loan with 3.5% down.
Still further prove that FHA loans are lenient, if the potential homebuyer has a score 579 to 500, they have a program that will allow for the loan to be issued if borrower can come up with a 10% down payment!
Allelujah!
In certain ways this is a better alternative because it allows for the Mortgage Insurance Premium (MIP) to be removed after 78-80 % of loan-to-value (LTV)… currently those loans with 3.5% down will carry MIP as long as loan is an FHA loan. ☹
Conventional Mortgage Loan
– Up To 20% Down Payment
Who Is The Conventional Mortgage Loan for?
This type of mortgage loan is designed for homebuyers who have higher level of savings and can afford to put 20% of down payment.
Homebuyers are usually and the higher income bracket and have higher credit scores.
Although the borrowers’ mid credit score still remains in the 620 (some lenders may require a higher score)
Conventional mortgage loans are made by lending institutions directly to the homebuyers without any backing from the government whatsoever.
The homebuyer will – in the majority of the cases come up with 20% down payment of the purchase price.
As I already have pointed elsewhere, but it is NOT ever to much to repeat it again: The higher the borrower’s credit score, the lower the financing rate. And, unfortunately, the reverse is true: Lower score homebuyers customarily pay a higher interest rate.
The majority of the mortgage loans made in the USA is called ‘conventional.’
5% Down Conventional Mortgage
Loan With Mortgage Insurance
Who is this program for?
Designed for all homebuyers with ‘good credit’ (620 FICO ® or higher)
Home Purchase will be for primary residence
Very recently a new product was created: 5% Down ‘Conventional’ mortgage loan …which will also require Private Mortgage Insurance [PMI]
…but their insurance premium is lower than those of FHA and they do NOT require Upfront fee either!
Anyone with 620 credit score (or higher) can apply for this kind of loan, as long as it is for a primary residence and you can locate a lender who does it.
What I like about this program is that you can ask for the PMI to be removed when you reach a loan to value (LTV) 80% of the purchase price …in a combination of down payment + monthly payments + a market value appreciation of the property.
FHA loans used to be this way – but no longer!
Best of both worlds! NOT everybody carries it! But they are out there!
Actually, I have recently worked with a young buyer whom, giving the rapid home value increase that we have had, he was able to remove the PMI in less than three years!
5% Down Conventional With PMI are well worth looking for them, in my opinion.
I really would like for this kind of program will thrive and become widely available – it really has the potential to help ton of good folks out there!
Down Payment Assistance (DPA)
Who Are DPAs For?
Low-and-mid-income (LMIs) folks
Primary residence (NOT rentals, NOT investment properties)
There are different types of DPAs:
Repayable second mortgage
a: “Active” second mortgage: homebuyer start paying them back right away, along with the first position mortgage
1.b: “Silent” second mortgage: No payments are required as long as they live in the house and until the sell it OR passe away (dies)
2. Non-repayable “Phase-out” second mortgage: Yet another type of DPA will start phase out; typical between 3 and 5 years after purchase.
After that initial period, every year a portion of the initial DPA belongs to the homebuyer until the initial DPA phase out 100% …AND they will belong to the the homebuyer forever more!
3. Grants – by definition are non-repayable
Until now I have been writing this page from the assumption that you will come with your down payment money “out of your pocket.”
If that is the case, you need to be prepared with some money saved up. It can be either in cash or in assets you will be able to covert to currency in a short period of time… In time for closing!
However, depending where you are and/or the area you are going to buy and/or your line of work and/or depending on your timing, you may be in luck and plug in with a down payment assistance (DPA).
Down payment assistance is, in essence, some money to help you with your home down payment. Or a ‘cash boost’ if you will.
Most are handled via government agencies or quasi-government.
The way it works, a ‘silent second mortgage’ is created. You do not have to make any payments on it …until you sell the house OR – please close attention to this one: Until you refinance it.
Very recently I had one of my buyers who refinanced his house AND he had ‘forgot’ there was a ‘silent second mortgage’ on it!
Well, the title search did not! He had to pay the DPA amount at the closing of the refinancing.
You will have to pay back the nominal amount they’ve loaned to you.
Which is to say: The program has contributed $12,000 at the time of your home purchase …12, 15, 20 or even 32 years later you sell that house, all you will pay back to the program will be $12,000!
No interest! Honey sweet, hum?
Home Buying Grants
Home Buying Grants are available in many areas and for many different reasons. As I will show you some examples below: a) they work and b) they can be combined, so you can add them to your down payment. In Atlanta area there are an abundance of grants. Here are some examples that come to mind and which I have seen in the past:
Opportunity Down Payment Program
Vine City English Avenue Trust Fund
IHOP – Atlanta Affordable Home Ownership Program
Beltline Affordable Housing Trust Fund
Affordable Downtown Condos Program (Atlanta)
MAP – Mortgage Assistance Program
NSP – Neighborhood Stabilization Program
Historic Neighborhood Housing
…And Georgia Dream
NOTE: These Home Grants either exist OR, at one point, they have existed…
My point here is that these programs abound! In mind ‘real estate mind’ they are like the stars eventually, they may die! But there is another soon to be discovered!
I am also sure that others have been created which I have yet to get the wind on them!
I am very confident that in the area you live would have similar programs as well.
Grants, by definition, do NOT need to be paid back! …EXTREMELY sweet!
Georgia Dream
For those aspiring homeowners living in my home state of Georgia, here is my especial contribution to your own quest:
There Are Home Buying Grants In All 50 States …And Territories Too
I have been working with grants and DPAs for more than 15 years now.
I have studied and checked them: I was able to find DPAs in all 50 states as well as in the territories.
So it does not matter where you are reading this page, you have my personal guaranty that there is at least one DPA program near you!
But in fact, I think that there are several!
I have received emails from folks who said – “I want to apply for a ‘non-repayable’” …I am sorry to say that it is NOT up to me to determine that.
It is pretty much up to each state will make their own determination.
Some times counties and/or cities will have their funds and they will establish how to run their programs.
I find that the ‘active second mortgage’ programs are the least favorable ones – although they will loan the money to put you over the hump. So, they are still an extremely valuable deal!
All others, my God! They are sweet as honey!
Even the ones that you will have to pay when the home is sold ...havens only will know how many years down the road?!
I would take a DPA any day, all day long!
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