Mortgage Down Payment

The down payment is the part of the purchase price that you pay in cash and is not included as part of the loan amount. The bigger your initial down payment, the smaller your loan, which reduces the amount of your payments and makes it easier to qualify for the loan.

LTV (Loan-to-Value)

With regards to down payments, you will often hear the term of LTV (Loan-to-Value) rate. The amount that you can borrow, your interest rate, and the availability of certain types of mortgages depend on your LTV ratio. Your LTV ratio is simply your mortgage amount divided by the value of your property (your purchase price or the appraised value of the home). If you put 20% of your purchase price down, you will be borrowing 80% of the purchase price, which makes 80% LTV.

How much to put down

Mortgage plans have various down payment requirements, which can range from 0% to 30% (100% to 70% LTV) of the cost of the house. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property. On the other hand, for most first-time home-buyers, saving enough money for a down payment is a major hurdle to owning a home. You may also figure that, putting down as little as possible, you’ll have that much more to invest. Experts say the less you put down, the better investment it will make.

How much you'll put down depends on the cash you have available and the amounts you'll need for closing costs, the loan type you can get, and your preferences. Traditionally lenders have required at least 20% down. However, in today’s flexible mortgage market, there are many special financing arrangements that will help you afford a home of your own with a lower down payment.

More than 20% down: If you can put down more than 20%, your lender may be willing to overlook past credit blemishes, approve your loan without verifying your income or both.
20% down: There are advantages of putting 20% down. You immediately have substantial equity in your home and you will avoid private mortgage insurance.
Less than 20 percent: You can get a loan with a low down payment, but you may have to obtain private mortgage insurance (PMI) to protect the lender before your loan is approved.

Low down payment options

There are many options to purchase a home with a low down payment. Low and no down payment options allow for as little as three percent down, or no down payment at all for borrowers with good credit but with minimal funds for a down payment.

However, these mortgages aren't as cheap as they seem. You likely will have to pay a higher interest rate, buy mortgage insurance (borrowers usually pay 20% of a home's value to avoid this) and make bigger monthly mortgage payments. They may require stricter credit and income in your application file. Be sure to contact your lender for all the specifics related to loans with this type of option.

Government-backed Programs:
If you are of a low- or moderate-income family or a veteran, find out whether you are eligible for a FHA (Federal Housing Administration) loan or a VA (Department of Veterans Affairs) loan, which require little or no down payment. These government agencies are not lenders, but they insure or guarantee government-backed loans made by private mortgage companies. By offering mortgage insurance, lenders are able to provide credit to potential home-buyers underserved by the conventional mortgage market. However, these government loan programs have some restrictions and disadvantages, such as low loan limits. You can also check Local Housing Authorities if they have special programs in which they will give you down payment assistance.
Loans with Private Mortgage Insurance:
There has been a proliferation of low-down options in the private market in the last decade. Most of them are offered to low- and moderate-income borrowers but you will still be able to find options for bigger loans. With a low down payment, you will provably have to pay private mortgage insurance (PMI) until you’ve built your equity up to 20% of your home value. PMI protects the lender by ensuring that the debt is repaid if you default on the loan. This adds approximately an extra half a percent onto the loan.
Conforming Loans
Conforming loans conform to the underwriting standards of Fannie Mae and Freddie Mac, the privately held companies created by Congress to increase the availability and affordability of homeownership. They are secondary lenders that lend to the institution that lends to you. Both have no- and low-down mortgage products offered through private lenders, which include Fannie Mae's Flexible products and Freddie Mac’s Alt 97 and FM 100. Their loans have no income restrictions but require a good credit rating. Ask your lender or mortgage broker for information on their various programs.
Piggy Back Loans (80-10-10):
By getting a second mortgage, you may avoid mortgage insurance. You receive a first mortgage, usually for 80% of the home value, then a second mortgage or home-equity line of credit for 10%. But you have to come up with the remaining 10%. Some lenders are willing to provide up to 20% for the second mortgage to eliminate the need for a down payment. Your interest rate for the second mortgage will go up higher, but you can avoid costly mortgage insurance.
Seller Financing (Creative Financing):
Look for property whose seller is willing to act as the lender. You may be able to get a second mortgage from the seller in addition to acquiring a new mortgage from an institutional lender, or get seller contributions to your closing costs. You don't have to meet institutional credit standards and may be able to work out a better deal. The problem is that very often sellers do not want to do this because of the risk involved. Additionally, many lenders today set not only a maximum loan amount, but also maximum combined loan amount, in which seller financing is also counted.