You’ve likely heard that it’s now common, and required, that someone applying for a home loan will have to plunk down 20 percent of the purchase price. That’s the conventional wisdom; however, it’s really a misconception of how lenders operate.
What your down payment will be depends on several factors. First and foremost, the amount you want to borrow, right along with your credit score, assets and liabilities, and cash reserves. It’s also dependent on who the lender is, for instance an FHA or VA loan, a conventional loan or a product offered by a mortgage broker.
The amount also depends not only on the borrower’s finances, but other factors, such as their employment. For those who are self employed, the down payment will likely be higher than their salaried counterparts making the same amount of money. The irony for self-employed individuals is they minimize their income to avoid paying more in taxes, but that reflects poorly on a home loan application.
Types of Residential Home Mortgage Products
Currently, there are four kinds of mortgages; however, of the four, one is only available on what lenders refer to as the “secondary market”. These mortgages consists of the fixed rate mortgage, the adjustable rate mortgage, the jumbo mortgage, and something akin to the once popular stated income mortgage.
“When you are saving money for your first home, it can be daunting to think about how much cash you will need to become a homeowner. You will need to consult with a lender to evaluate your individualized loan options, but before you do that, you should consider the pros and cons of various down payment scenarios.” —Realtor.com
Fixed rate mortgages range in span from 15 years to 30 years and the interest rate is locked in, currently at a cost of about 4.2 percent. The borrower may also pay points, which helps to lower the borrower’s monthly payment because it’s prepaid interest.
Adjustable rate mortgages or ARM loans work on a 30 year amortization rate, with ratios of 7/1, 5/1, and 3/1. These products typically allow borrowers to qualify for more than they would through a fixed rate mortgage, however, the rate as you might guess, are higher.
Jumbo mortgages are either fixed or adjustable and are for buyers who need larger purchasing power, generally in the $1 million to $2 million range. There are also hybrid product, but these are not widely available and are typically for specific situations.
How Much You Should Put Down for a Mortgage Down Payment
How much you ought to put down is as much as you can truly afford. Most lenders like borrowers to have at least enough in their bank accounts to cover closing costs, as well as cash equal to two or more months worth of principal, interest, and taxes.
Currently, for FHA loans and VA loans, borrowers will be required to make a down payment of 2.5 percent, to 3 percent, and up to 5 percent or more. Borrowers who make a down payment of 20 percent will be exempted from paying PMI or Private Mortgage Insurance, which pays the balance to the lender should the borrower default.
The amount you put down depends not only on how much you intend to borrow, but also, how much you want to save over the life of the loan. Financial experts advise borrowers to apply for a home loan only after carefully reviewing their credit files and disputing any inaccuracies by mail. Any legitimate debts should be paid off, and the recommended DTI or debt-to-income ratio should be no more than 35 percent to 45 percent. That’s the difference between your gross monthly income and monthly obligations.