Mortgage Down Payments: How Much Is Too Much?

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Jul 5, 2021 Homebuyer blog

Mortgage Down Payments How Much Is Too Much | Reach Home Loans

You’re ready to get a house for your family, and you think that you can make monthly mortgage payments. However, there’s this one thing blocking your way—the down payment. Yes, down payments are almost inevitable. Take note, the key term here is “almost inevitable.” While down payments are common in mortgage transactions, not all require down payments.

In this article, we’ll discuss the nature of down payments and why they are necessary for mortgage transactions. Furthermore, we’ll tackle typical down payment terms and introduce no down payment mortgages along the way. Let’s dive in!

What Is a Down Payment?

A down payment is the amount of cash you initially pay when you purchase a house. In banking and finance, down payments vary in size. However, they’re not arbitrary. Lenders use sophisticated methods to assess the amount of down payment needed in a particular mortgage application.

Today, down payment rates range from zero to 20 percent. Take the hint there. There are zero down payments, and we’ll discuss them in the fourth section of this article. In the meantime, let’s first talk about why down payments are necessary.

First and foremost, every financial transaction entails risk.

Risk is a crucial element in finance. When people apply for loans, lenders try to select borrowers with lesser risk. However, lenders also accept risky borrowers by offsetting risks with high rewards. As a result, these borrowers get higher interest rates, higher down payments, or even both.

Why Is a 20% Down Payment Common?

You’ve probably heard of the “20% rule,” in mortgages. However, not all loans require a 20-percent down payment. If you let a lender choose between a five-percent and 20-percent down payment, he’ll surely choose 20 percent. The reason why lenders prefer a higher down payment is that there’s an assurance of payment.

By paying a high down payment, you already have a considerable stake in the purchase. Meaning, you’ve already put down a huge sum, and turning back would be disadvantageous on your part. In other words, a down payment makes you less risky to lenders.

For example, the loan is $250,000, and 20 percent is $50,000, which is already a huge sum of money. Should you turn back on the mortgage, you immediately lose $50,000.

How Much Do You Really Need to Put Down?

Down payments are not your enemy. Though they require a large amount upfront, they affect your monthly mortgage payments. In addition, down payments reduce the principal of the loan.

The remaining principal gets divided into equal monthly payments over the term of the loan. With a smaller principal, you’ll have smaller mortgage payments. Otherwise, the opposite is true.

Overall, a down payment can affect your monthly obligations. So if you want to have smaller payments in the future, a higher down payment is recommended. However, keep in mind that lenders will set a limit on down payments since it’ll be disadvantageous to them if you set a very high down payment.

Minimum Down Payments Less than 20%

In a conventional loan, the standard down payment is 20 percent. If you have a good credit history, it can go lower. You can also choose a 20 percent down payment if you don’t want mortgage insurance. However, if you’re on a tight budget right now, here are some loan types that don’t ask for a 20-percent down payment:

  • Federal Housing Authority (FHA) loans – as low as 3.5 percent
  • Veteran Assistance (VA) loans for eligible surviving spouses, current service members, or veterans – NO down payment required
  • USDA loans for rural and suburban buyers meeting income limits – NO down payment
  • Conventional loan with mortgage insurance – as low as 3 percent
  • Fannie Mae HomeReady and Freddie Mac Home Possible – as low as 3 percent

Take note that these are minimum amounts. It can go up depending on your credit history.

A Couple Applying For A Housing Loan | Reach Home Loans

Reach Home Loans Can Help You Decide the Best Down Payment Terms

Are you ready to get a home loan? Reach Home Loans can offer you different loan products just like those mentioned above. In addition, we also offer jumbo loans, 203(k) loans, and refinancing options. You may check our loan options to find out what’s best for you.

At Reach Home Loans, we want to help you get your dream house. Call us now at 954-703-1465, and let’s arrange your loan application process right away.

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