Should I make a small or large down payment?

With all the different types of loans available, naturally you'd expect some to offer a low down payment or zero for qualified borrowers. It is a nice surprise to find out that low and no down payment mortgages still offer great rates even though the lender's risk is increased.

Zero Down USDA Loans
If you are seeking to purchase a home in a suburban or rural area a USDA loan with 100 percent financing may be the ideal loan choice. The United States Department of Agriculture (USDA) insures this loan in an attempt to encourage homeownership in less-densely populated areas.

This loan is available in suburban and rural areas, not for farms, but single family homes. This loan has less-costly mortgage insurance than an FHA loan. On a $350,000 USDA loan, the insurance will be $1,600 less than an FHA loan This loan product probably has the least name recognition of any loan type, yet it's growing in popularity as home buyers realize its benefits.

0% Down VA Home Loan
One of the most well-known home loans for 100-percent financing is the VA loan. Eligible active duty military members and U.S. military veterans and spouses can apply for this loan program by the U.S. Department of Veterans Affairs (VA). A major advantage of this loan program is that no mortgage insurance is necessary so the savings can be tremendous.

EXAMPLE:
On a loan of $337,500 a homebuyer getting a VA loan can save over $2,500 annually compared to an FHA buyer.

Moreover, the lowest interest rates out of all loan types are with VA mortgages. Their rates are frequently lower by 0.25% versus a conventional loan. Additionally, all of the closing costs can be paid by a family member as a gift or as a credit from the seller. Those are some nice benefits for those who honorably served our country. I'm happy I did.

Check your VA loan eligibility prior to making a choice of which loan you want to apply for.

The following are ways in which you can buy a home with a small down payment available, or even if you have no down payment whatsoever.

The lowest down payment for an FHA mortgage is 3.5 percent, but that down payment can come as a cash gift from a relative or through certain down payment assistance programs.

Conventional loans that are conforming, feature down payments of 3 percent or more.

  • HomeReady: Your qualifying income can include adults living in the home but who are not applying for the loan. This means the income from roommates and granny unit can help the borrower.
  • Home Possible® Advantage: A Freddie Mac 3 percent down payment loan offering reduced mortgage insurance
  • Conventional 97: A 3-percent down loan from Fannie Mae without income limits or first-time home buyer conditions

5 percent down mortgage
For home buyers buying their primary home, not a second home or rental property, there's a plethora of loan products which allow a five percent down payment. Depending on your loan amount, income, monthly debts, your minimum FICO score could range from 700 and up to be qualified.

10 percent down mortgage
If you can comfortably put down 10 percent of the purchase price, the available loan products for you increases. As an example, you may qualify to purchase a 2 ½ million-dollar home with 10-percent down. If your credit score is below 580, FHA permits borrowers with ten percent down to buy a home as a primary residence.

As you may have guessed, private mortgage insurance is mandatory on first mortgage loans that are greater than 80-percent of the home value. Mortgage insurance for a home with 90-percent financing costs less than one with 95-percent financing. Another popular way to get a loan without mortgage insurance is to get a piggyback loan.

How a piggyback loan works:
The borrower applies for and obtains an 80-percent first mortgage, a 10 percent second mortgage and comes in with 10-percent of their own funds. Now mortgage insurance is not needed. The 80/10/10 or 80/15/5 loans, as labeled by industry experts, are Piggyback loans. These are available only to borrowers with FICO credit scores of 700 or higher depending on the lender's guidelines.

2 Reasons to not put 20 percent down
1.) You'll have access to cash. Use your money to pay off other debts, for new investments, or to build up an emergency savings during rough patches.

You may be able to withdraw up to 20 percent of down payment funds from your 401k or IRA but there may be a penalty. The market may be starting an uptrend so you'd miss out if do this too soon. You may be very disappointed at the time you decide to retire.

2.) Waiting May Cost You
Let's say the data shows that home values are increasing each year by 1-2%. If you want to purchase a $400,000 home, you’ll have to put down $80,000, but you won’t have that saved up for another 1.5-2 years. In two years, the home may cost $416,000 (or more). So, you’ll actually need $84,000 in two years. In addition, interest rates may have moved up too.

The big disadvantages of a low down payment, as pointed out above, is that mortgage insurance will increase your payment. If you get a loan without mortgage insurance and less than 20-percent down, the rate will be higher by .50-1.00%.

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