The required minimum mortgage down payment varies based on the mortgage program. This article outlines the minimum down payments for various home loans, and provides principals for common down payment amounts.
The recommended down payment amount is specific to an individual. There are circumstances where it may be prudent to put less money down. Knowing when to do so is the key.
- Mortgage Down Payment Overview
- Putting Less Down
- Conventional Loans
- Government Loans
- Various Bond Programs
Mortgage Down Payment Overview
Below are the generic requirements for the minimum mortgage down payment for the most popular home loan programs.
- VA = 0% down
- USDA = 0% down
- Various Bond Programs = 0% down
- Conforming = 3% down
- FHA = 3.5% down
- Jumbo = 20% down*
- Non-Qualified Mortgages = 20% down*
It’s worth noting that there are jumbo and non-qualified mortgage programs that allow for smaller down payments. The 20% mortgage down payment listed above is the generic (and most common) requirement for these program types.
Some investors (i.e. banks) offer “professional programs” that allow for zero down payment. These programs are typically for for doctors and attorneys. The reason banks offer these products is to solicit the commercial banking business of these professionals after they close their home loan.
Putting Less Down
Mortgage down payment amounts are not one size fits all. The appropriate amount depends on the individual’s financial goals and payment objectives.
We often recommend a smaller down payment when a homebuyer can’t decide on the amount to contribute. There are good reasons why putting less down may be more financially prudent.
First, putting a lessor amount down retains capital to cover future expenses. Moving is expensive. Furnishing a home is expensive. Having cash in the bank alleviates stress while incurring these one-time large expenses.
Secondly, putting less money down may allow the homeowner to reduce their consumer debt balances. Paying off debt may result in greater monthly cash flow.
For example, put down 5% instead of 20% and then use the 15% difference to pay off outstanding credit card debt. The credit-card payment is often higher than the increase to the monthly mortgage payment.
Lastly, the vast majority of home loans allow additional principal payments after closing. A homeowner can later pay additional principal in the event they regret not doing a larger down payment.
Note: non-qualified mortgages with prepayment penalties may not allow excessive principal reductions. These types of loans are for investment properties and are not mainstream.
Consider Closing Costs
Another thing to consider when determining the down payment amount is the additional cost for closing. The mortgage down payment is only one part of what’s due at closing and funding.
The funds due at closing consists of three different components:
While there are many different methods to pay for closing costs, the mortgage payment must come from the borrower. In other words, the lender, seller, or Realtor cannot contribute funds toward the down payment.
The good news is that gift funds are acceptable sources of down payments for primary and second home loans. Gift funds are not allow for investment property mortgages.
Be sure to plan for the additional funds needed at closing beyond the mortgage down payment.
Conventional home loans are mortgages that are non-government loans. This means the majority of home loans are conventional loans except for FHA, VA, and USDA.
Conventional mortgages can be divided into two categories; conforming loans and non-conforming loans. Non-conforming mortgages are also known as jumbo loans.
Conforming loans are conventional mortgages with loan amounts of $700,000 or less. A non-conforming loan is a mortgage with a loan amount greater than $700,000.
There are parts of the country that allow high cost mortgages. These are mortgage in excess of the conforming loan limit, but follow the conforming underwriting guidelines. These mortgages exists in states like California and Hawaii where property values are extremely high.
Conforming loans are non-jumbo conventional loans. The minimum mortgage down payment for conforming loans is 3%. The down payment percentage impacts the mortgage insurance for conforming loans.
Most conforming loans with less than 20% down will require private mortgage insurance (PMI). There are loans that don’t require a 20% down payment to avoid PMI. See our mortgage insurance overview to learn more about those programs.
5% Intervals (up to 20%)
We recommend making mortgage down payments in five percent intervals for conforming loans. (i.e. 5%, 10%, 15%, or 20%). The reason for this is because the mortgage insurance (MI) rates improve for every five percent change in down payment.
For example, a home loan with a random mortgage down payment amount (like 7.8%) has the same interest rate and PMI terms as a loan with 5% down. There no benefit to the rate or the MI for parting with the extra money.
Furthermore, the incremental down payment amount (of 7.8% verses 5%) doesn’t significantly impact the monthly payment. The difference between an extra $1,000 mortgage down payment only changes the monthly payment by about $6 on a 30-year note. On a 15-year note, the extra $1,000 changes the payment by approximately $8 per month.
A mortgage down payment of 20% or more on a conventional loan will avoid private mortgage insurance. A down payment of 20% also offers the option to waive escrows.
Putting down more than 20% obviously reduces the loan amount; however, it typically doesn’t have any major impact on the interest rate.
Most Jumbo Loans will require that you put down 20% or more; however, we do have a few outlets that will allow for a 10% to 15% down payment. Just know that if you decide to put less than 20% down, you will most likely be in an ARM product and pay a premium for the rate. (
Depending on the size of the loan amount, a 25% or 30% down payment maybe required. This typically comes into play when financing more than $1 million dollars.
There are programs for doctors and attorneys that allow for a 0% mortgage down payment. These investors are typically regional banks that offer these “professional’s programs.” The Mortgage Mark Team can broker these professionals loans to local banks; however, we refer someone directly to another bank in the event it makes more financial sense.
The federal government offers various home loan programs. First off, the Housing of Urban Development (HUD) offers FHA mortgages. Second, the Veteran Administration offers VA home loans. And finally, the United States Department of Agriculture offers USDA home loans.
All of these government-backed home loans offer low mortgage down payment options. Likewise, these government loans may offer lower interest rates compared to alternative programs (although this isn’t an absolute).
Lastly, government programs typically offer more flexible underwriting guidelines. Government home loans, unlike conventional mortgages, can be manually underwritten. This means a human – not a computer – can issue the loan approval. This allows for common-sense underwriting and promotes homeownership.
The tradeoff for the aforementioned benefits is that these government loans mandate some form of upfront MIP. These upfront fees can be as little as 1% and as much as 3.3%.
These insurance premiums cover the lender’s losses incurred from defaults (i.e. foreclosures). It’s because of these insurance premiums that lender can offer these low-down-payment options and flexible underwriting guidelines.
FHA home loans require a 3.5% minimum mortgage down payment; however, there are some benefits to putting down as much as 5% or 10%.
Regardless of the mortgage down payment amount, FHA requires a 1.75% upfront MIP fee as well as having MIP as part of the monthly payment.
5% FHA Mortgage Down Payment
There is a small benefit to putting down 5% compared to the minimum amount of 3.5%. The monthly mortgage insurance premium factor reduces from .85% to .80% when putting down 5% or more.
While these decreases sounds appealing, the impact is nominal.
For example: on a $300,000 sales price, a 3.5% down payment is $10,500. A 5% mortgage down payment is $15,000. This extra $4,500 down reduces the monthly MI by .05%.
The result of the increased mortgage down payment is a savings of $16 per month for the MIP. This is because of the .05% decrease in the MIP rate and the lower loan amount.
In the example above, it may be prudent to keep the extra $4,500 (or 1.5%) in the bank since the monthly tradeoff is so small. Plus, the increase interest and MIP paid may be tax deductible.
10% FHA Mortgage Down Payment
When putting down 10% or more, the FHA monthly mortgage insurance premium can be cancelled after ten years. Conversely, when putting down less than 10% the FHA MIP is permanent.
When putting down 10% on an FHA loan, it worth exploring conventional financing. There are two primary reasons why FHA financing may be better than conventional financing when putting down 10%.
The first is that the borrower needs FHA’s more flexible credit guidelines to qualify. The second is because FHA’s interest rates are typically better for borrowers with lower credit scores. Otherwise, conventional financing may be more advantageous because of it’s lower MI factors.
VA home loans don’t require a down payment (assuming the Veteran has full entitlement). The 100% financing is available for home prices up to $1,500,000. A mortgage down payment is required when the sales price exceeds $1,500,000.
One of the biggest benefits of VA is the fact that it allows zero dollars for a mortgage down payment. Therefore, when putting money down for VA financing, it’s wise to compare VA to conventional financing.
VA With Less Than 20% Down
When the mortgage down payment is less than 20%, VA will most likely make more sense than conventional financing. VA does not require monthly mortgage insurance whereas conventional PMI will be mandatory.
VA With 20% Down (or more)
When putting down 20% or more, conventional financing may be viable option. VA’s upfront funding fee may negate the benefits offered by VA. Check out our VA home loan page for more details on the funding fee.
Likewise, while VA interest rates are often lower than those of other mortgage programs, this isn’t always the case. Conventional and jumbo interest rates can sometimes be lower than those of VA. A mortgage down payment of 20% means there are options. Explore them!
USDA home loans offer 100% financing; this means the minimum mortgage down payment is zero dollars.
A home buyer can come to closing with zero money out of pocket. USDA allows 2% of the closing cost to be rolled into the loan amount. The catch is that the home must appraise for at least 2% higher than the sales price.
There are two major hurdles that may exclude eligibility for USDA financing. The first is the property location. The home must be located in an USDA-approved area. The second, the household income must not exceed the income limits set by USDA.
USDA loans do require a 1% guarantee fee (which is a type of upfront mortgage insurance premium). This guarantee fee is automatically rolled in to the loan amount. While USDA does require mortgage insurance payment, it’s only .35%. This is substantially lower than that of FHA (and even most conventional loans).
USDA is an amazing mortgage option for those that are eligible. The combination of the zero down, a low guarantee fee, and the low monthly MIP makes it awesome for those who qualify.
Various Bond Programs
Many bond programs allow 100% financing. This means the mortgage down payment is zero. There are a number of different bond programs available.
In Texas, the most popular bond programs are TSAHC, TDHCA, and SETH. Please call us directly if you would like more information on these loans.
The Mortgage Mark Team can originate mortgages throughout the United States. However, we will decline doing bond loans outside of Texas. Bond programs can be tricky and we do not want to jeopardize anyone’s loan by originating an unfamiliar program.
In conclusion, there is no one-size-fits-all approach for a mortgage down payment. The Mortgage Mark Team will provide council via our client consultations. We will ensure that payment objectives align with loan-term financial goals.