This blog post has been migrated to my new blog, you can find it here: How much down payment do I need to buy a house?
Conforming Mortgages
Conforming loans are the most popular loans and are often mistakenly referred to as conventional loans (another post for another time). These loans conform to the guidelines of Fannie Mae and Freddie Mac - two mortgage giants. By following conforming mortgage guidelines, lenders are able to sell their loans on the secondary market, which is advantageous to the lender. Read this article to understand why a lender's ability to sell mortgages benefits everyone: Why are home mortgages sold?
Among the most important guidelines Fannie Mae and Freddie Mac set is the minimum 5% down payment. As recently as last year, conforming options included 3% down payment loans, but in November 2013 these mortgages were eliminated.
Conforming loans with less than 20% down payment require private mortgage insurance (PMI). PMI is a monthly payment that protects the lender in the event of a default and is automatically canceled when the homeowner has 22% equity in the home.
The Down Payment Sweet Spot
Conforming loans have a major benefit for people who are able to come up with a larger down payment. At 20% down payment, no mortgage insurance is required on conforming loans. Most people who are able to put down 20% or more on a home purchase choose conforming loans for this reason.
FHA Mortgages
FHA loans are insured by the government and require just 3.5% down payment. This is one of the reasons they remain a popular mortgage option for first time home buyers. This lower down payment requirement is not without its downside, however.
Mortgage Insurance Premium (MIP)
FHA loans require two different types of mortgage insurance premium (MIP). The first type is called upfront mortgage insurance premium (UFMIP) and is required on all FHA loans. The current UFMIP fee is 1.75% of the loan amount. UFMIP is typically financed, meaning it is added on to the loan amount rather than paid by the borrower at the time of purchase.
The second type is called monthly mortgage insurance premium. Monthly MIP amounts vary depending on the down payment and loan term. Currently, FHA's monthly MIP payments are significantly higher than conforming PMI payments. Monthly MIP is required for the life of the loan if the down payment is less than 10% or for a minimum of 11 years if the down payment is more than 10%.
VA Mortgages
VA loans exist to help veterans, service members and surviving spouses obtain favorable mortgage terms. They are partially guaranteed by the government, which allows lenders to offer them with 0% down payment. This makes them a very attractive option for those who qualify. VA loans do not have any monthly PMI or MIP, which is another huge benefit.
VA Funding Fee
VA mortgages do have an upfront fee, somewhat similar to FHA's UFMIP. It is called a funding fee and just like UFMIP, it may be financed rather than paid at the time of closing. The funding fee for a home purchase currently ranges from 1.25-3.30% depending on down payment and whether or not the borrower has used VA benefits in the past. It is important to note that qualifying disabled veterans and surviving spouses are exempt from any funding fees.
Jumbo Mortgages
Jumbo mortgages will vary greatly from lender to lender. A jumbo mortgage is one that has a higher loan amount than the conforming limits will allow. Since they do not follow conforming, FHA or VA guidelines, lenders make their own rules when it comes to jumbo loans. The lowest down payment option I have seen for a jumbo mortgage is 10% down payment. My company currently offers this option for those of you reading this in Arizona.
Many lenders fall into the 20% minimum down payment category when it comes to jumbo mortgages. The amount you are borrowing can also affect the amount of down payment required. The higher the loan amount, the higher the probability is that a larger down payment is required. It is best to consult a mortgage professional or two directly if you are in the jumbo market because rules and options can vary so greatly.
USDA Mortgages
The USDA loan program was developed to help people in rural areas purchase homes at more favorable terms. USDA stands for United States Department of Agriculture (yes, that USDA). The loans have strict limits on household income and the property must be located in an eligible rural area. If both borrower and property meet eligibility requirements, USDA loans offer 0% down payment. They do have an upfront fee called a guarantee fee, which may be financed if the homeowner wishes. They also have monthly mortgage insurance, but the payments are significantly lower than FHA and somewhat lower than conforming mortgage insurance payments.
One Final Note - Down Payment Assistance Programs
They aren't necessarily separate programs, but it is important to know that most areas of the country have down payment assistance programs.
For example, I reside in Maricopa County, Arizona and we have a program called Home in 5 that provides 5% down payment assistance to qualified borrowers. This program can be combined with FHA or VA loans to provide even lower down payment options.
Down payment assistance programs come in too many varieties to cover here. Some require repayment, others do not. Some are actually a second lien on the property, others are simply a grant. Some have payments and interest, others have neither. These programs vary greatly by region, so it's best to do some online research on the topic or, better yet, call a local professional. They can walk you through the ins and outs of options available in your area.
I hope that provides a little clarity on the subject of down payments. As always, thanks for reading my blog!
My website: Mortgage Programs in Arizona
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