A down payment may cut into your reserves, but it can lead to more loan choices and a better monthly payment. The down payment is the difference between the value of the home you want to purchase and the amount a lender will finance. Some lenders are willing to finance a larger percentage, which makes for a lower down payment requirement. The amount you need for a down payment is based on a few factors, most notably, your loan-to-value ratio and property type.
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Down Payments Range From 3% to 25%
Conventional mortgages make up the majority of home loans. Fannie Mae and Freddie Mac set conventional guidelines for loan amounts of up to $417,000 in most areas. A conventional loan requires between 3 percent and 25 percent down.
Federal Housing Administration loans are another popular form of financing. FHA loans are insured by the government and tend to have more flexible qualifying guidelines than conventional loans. FHA loans require 3.5 percent down. However, some FHA lenders may require borrowers with bad credit scores -- between 500 and 579 -- to make a 10 percent down payment.
Down Payment Based on Home Value
The down payment is based on the lesser of a home's price or its value. Value is determined by a professional home appraisal and it may not match the sale price. For example, if you were purchasing a home for $200,000, but the lender determines that the appraised value is only $175,000, your down payment would be based on the lower, appraised amount of $175,000. If the down payment requirement for the loan is 20 percent, you would need a down payment of $35,000. If the sale price and the appraised value were the same at $200,000, you would need a down payment of $40,000.
Higher Down Payments Required in Some Cases
Investment and second homes require a higher down payment. Conventional lenders typically require between 15 percent and 25 percent down on one- to four-unit investment homes and 10 percent to 15 percent on second homes, which are used neither as income property nor principal residences. Two-, three- and four-unit properties typically have higher down payment requirements, whether used as investment or primary homes. Loan type can also cause your down payment to be higher. Adjustable-rate mortgages, or ARMS, are riskier, as payments can increase in the future, so they may have a higher down payment requirement.
First-Time Homebuyers Have Down Payment Options
If you haven't owned a home in the past three years, you may qualify for a lower down payment as a first-time homebuyer. As of the time of publication, Fannie Mae and Freddie Mac offered first-timers 3 percent down conventional financing. Both loans require you to pay private mortgage insurance, or PMI, an annual premium that covers the lender in case of default.
State and local housing agencies may also offer low down-payment options to reduce your down payment requirement on a first mortgage. These come in the form of secondary financing or grants, depending on the individual program. Check with your local housing authority to find out about these first-time homebuyer programs.