What is a Down Payment?
A down payment is often required by a lender in exchange for financing your home purchase. The down payment communicates your commitment to the lender, as well as your ability to repay your home loan.
Video: How down payment do you need?
Of course, a down payment is not an inconsiderable amount of money. It can comprise anywhere between 3 and 20 percent of the total sale cost, so it's in your best interests to know exactly how much you may need to put down in order to finance your home.
How Much Should I Put Down?
In a lender's eyes, the bigger the down payment the better. More money down signifies that you are a good credit risk, and can also result in you getting better rates and more options for your mortgage.
Though it's certainly possible to buy a home without the traditional 20 percent down, doing so means you'll have to buy private mortgage insurance. This extra insurance protects the lender from the risk of default. It also makes it possible for you to buy a home with as little as 3 to 5 percent down. Under the Homeowner's Protection Act of 1998, private mortgage insurance may be canceled once a mortgage is paid down to where it equals 80 of the original sale price or appraised value of the home at the time the loan was obtained.
What is the Minimum Down Payment?
Loans differ widely when it comes to minimum down payment requirements. While
some loans require no money down, many lenders want at least 5 or 10 percent
down. Of course, how much you put down is contingent on your personal financial
situation. While you may want to put 20 percent down to avoid paying PMI, you
may not have access to that kind of cash.
Making a lower down payment can have some advantages, not the least of which is that you don't have to come up with a daunting amount of money while trying to finance your home. In order to be considered for a low down payment loan, you'll need to have sufficient income for the monthly mortgage payment, cash for the down payment, cash for closing costs and other expenses, a good credit history, sufficient home appraisal value, and in some cases cash equal to two monthly mortgage payments.
What About Rental Properties?
Down payments for rental properties are steeper, with landlords generally expecting 20 to 25 percent down and other lenders demanding as much as 40 percent down. Loans on rental properties are also more expensive than those on residential properties, since lenders fear that investors are more likely to abandon their rentals than their own homes. If you're financing a rental property, you should expect interest rates that are 1-2 percentage points higher than those on residential mortgages.
Video: Investment Mortgage Loans
If you're looking to cut costs on financing rental properties, consider seller financing or owner-occupied loans. Also, some specialty lenders are amenable to smaller down payments if you're willing to pay a higher interest rate. Do your research before making any final decisions.