Twenty percent down is the gold standard. Anything less than that and you will have to pay private mortgage insurance (PMI) which can add substantially to your monthly mortgage payment.
QUESTION: How big a down payment does one need in order to get a mortgage? Do you really need 20 percent down?
ANSWER: The short answer is the bigger your down payment, the better. Twenty percent down is the gold standard. Anything less than that and you will have to pay private mortgage insurance (PMI) which can add substantially to your monthly mortgage payment. But there are many programs out there with much lower down payment requirements that you might qualify for.
If you or your spouse are a vet, and you qualify for a VA mortgage through the Veterans Administration (VA), you may be able to buy a home with no down payment. Interest rates are also low, and some closing costs can be financed.
Credit quality is also looser with a VA loan.
Another low down payment option is a mortgage backed by the Federal Housing Administration (FHA). An FHA mortgage also has looser credit requirements and a down payment requirement of as little as 3.5 percent. But you will have to pay mortgage insurance for the life of the loan. Fannie Mae and Freddie Mac also have programs requiring as little as 3 percent down, although you will generally need a higher credit score than FHA. But you will be able to cancel PMI once your loan-to-value reaches 22 percent.
The most common mortgage is a so-called, “conforming” or “conventional” mortgage that meets Fannie Mae and Freddie Mac guidelines. Lenders who underwrite these mortgages can then sell them to Fannie and Freddie who then package them and sell them to investors. To qualify for a conforming mortgage, you will generally need at least 10 percent down and good credit and income. The higher your down payment and credit score, the better interest rate you will get.
Not all conforming mortgages are sold to Fannie and Freddie. Banks will sometimes keep them, in which case, they may have a little more leeway on their underwriting criteria. If you have a good savings amount for a down payment and good credit, a conforming mortgage will be your best option. Be sure to shop around for the best terms and interest rate.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: email@example.com.