What Percentage Down Payment Do I Need?

By Markets Fool.com

Most mortgage loans require that you pay at least some money up front toward the purchase price of your home. This amount is known as a down payment, and how much you have to pay can vary depending on a number of factors.

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What Minimum Down Payments Are Required?

  • Different loan types have different requirements: Various loan programs have different rules on down payments that lenders must collect in order to offer mortgages. As a result, some loans for which you might qualify require smaller down payments than others.
  • Conventional loans: Most lenders will require you to make down payments of between 5% and 20% of the purchase price in order to qualify for a conventional loan.
  • Special loan options for first-time homebuyers: Several programs offer lower down payments to those who've never bought a home before. Federal Housing Administration loans offer down payments as low as 3.5% and are available to first-time homebuyers on single-family residences as well as properties with up to four housing units. New loans from Fannie Mae and Freddie Mac offer down payments of as little as 3% to first-time homebuyers.
  • Other low down payment loans: Many veterans can qualify for VA loans guaranteed by the U.S. Department of Veterans Affairs that have no down payment requirement. The U.S. Department of Agriculture also offers a guaranteed loan program that's designed to allow lenders to extend loans with little or no down payment requirements to borrowers in rural areas.

Why to Consider Making a Bigger Down Payment
Even if you can qualify for a low down payment loan, there are reasons you still might want to make a bigger down payment than the minimum.

  • To avoid paying private mortgage insurance: Most loans require additional private mortgage insurance, or PMI, until you have at least 20% to 25% of equity in your home. Making a 20% down payment is usually enough for lenders not to charge you for PMI.
  • To get a lower interest rate: Some lenders offer lower interest rates if you make a larger down payment. This reflects the fact that the bigger the down payment you make, the less credit risk the lender has to take on. A lower rate can make your mortgage cheaper over the life of the loan.
  • To make monthly payments more manageable: The larger your down payment, the smaller your loan amount, and therefore the smaller your monthly payments will be. Putting more money down can help you cut your monthly payments to a more manageable size for your budget.

Making a down payment can be the most challenging financial aspect of buying a home. By knowing your options, you'll improve your chances of finding a loan with a down payment that works for your budget.

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