If there’s one thing that most borrowers worry about, it’s the down payment for a home. The common myth is that you need 20% down on a home or you can’t get financing. Luckily, this isn’t the case. The most popular loan programs offer much lower minimum down payment requirements, helping you buy a home much faster.
Conventional Loan Minimum Down Payment Requirements
Conventional loans are the loans most people think of when buying a home. They are also the loans that have the 20% myth tied to them. However, that’s not the case today. You can secure conventional financing for just 5% down on the home.
There’s a tradeoff, though. If you opt not to put down 20%, you’ll have to pay Private Mortgage Insurance. The amount you pay depends on your credit score and LTV. The more money you put down on the home, the less PMI you pay.
Luckily, you can cancel the PMI once you owe less than 80% of the home’s value. In fact, lenders are required by law to cancel the insurance once you hit 78% LTV if you have not requested it sooner. However, you can speed up the process if your home appreciates. If you pay for another appraisal that proves the home is worth more and you owe less than 80% of that amount, you can have the PMI canceled while still keeping the same loan.
FHA Loan Minimum Down Payment Requirements
FHA loans used to be known as first-time homebuyer’s loans. That’s not the case today. Their flexible underwriting guidelines and lower credit score requirements make it a plausible loan for many borrowers. This is especially true for those starting over after overcoming the effects of the housing crisis.
Today, the FHA requires a minimum down payment of 3.5%. Let’s compare that to a conventional loan. Let’s say you borrow $200,000:
- Conventional loan down payment – $10,000
- FHA loan down payment – $7,000
$3,000 might not sound like a lot, but there’s more to it than that. FHA loans also require you to pay an upfront mortgage insurance fee and an annual mortgage insurance fee. The annual mortgage insurance is usually lower than the cost of PMI on a conventional loan. However, the difference is that the insurance on FHA loans doesn’t ever go away. You pay it for the term of the loan.
The only way out of FHA mortgage insurance is to refinance the loan into a conventional loan when you owe less than 80% of the home’s value.
VA Loan Minimum Down Payment Requirements
Veterans of the service with adequate time in active duty are eligible for VA loans. The time you must serve really isn’t all that long:
- Active duty during war – 90 days
- Active duty during peacetime – 181 days
- Serving in the Reserves or National Guard – 6 years
In exchange for your service, you can secure 100% financing with a VA loan. This means no down payment. This is obviously the lowest you can get with any loan program. Of course, putting no money down has its tradeoffs.
You won’t have any equity in the home as you start homeownership. The first couple of years of payments will mostly cover the interest on the loan, which will make it harder for you to gain equity in the home at anything but a slow pace. If, however, you don’t have the money to put down and you don’t want to pay mortgage insurance, this is a great program for veterans. The VA doesn’t charge mortgage insurance, just an upfront funding fee to help them keep guaranteeing loans for veterans of our country.
The minimum down payment requirements are just a guideline. If you take an FHA loan, for example, you aren’t restricted to putting down just 3.5%. You can put down as much as you want. However, you must put down at least 3.5%. Luckily, FHA and conventional programs both allow the use of gift funds from relatives or employers as long as you can prove they are a gift. This can help you reach the minimum requirements and get the loan that you need.