When buying a home ~ what are the traditional mortgage down payment requirements?  Traditional mortgage down payments have always been 3.5 to 20 percent of the total purchase price of the property for your primary residence.  If you are looking to buy a second home – reminder, a second home is considered a “vacation home”, or buy an investment property, the minimum down payment (usually 20%) and credit score requirements (usually 680 or better) are higher.

 

Down payment requirements do not vary between first-time home buyers or experienced home buyers.  Either can buy a home with minimum down payments.  Most second time buyers want to re-invest the proceeds from the sale of their existing home into the new home in order to avoid paying any sort of mortgage insurance.

 

What about first-time home buyers or those with little to no equity? In today’s market, it is prohibitive even for the most frugal of first-time home buyers to come up with a traditional down payment. Houses that sell for $200,000 can require a substantial down payment, but there are options.

 

Let’s look at some of them.

 

VA Loans

Veterans Administration loans are designed to help active or retired US Military, Coast Guard, National Guard, or Reserves that are eligible for VA this benefit.  VA loans do not don’t require a down payment or mortgage insurance.

 

All VA loans will have a  VA Funding Fee and is required by law, unless the veteran is documented to have more than a 20% disability. The fee, currently 2.15% on no down payment loans for a first-time use, is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is 3.3%. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. Once the home buyer is placing more than a 5% down payment, the advantages of a VA loan diminish.  VA loans are backed or insured by the federal government. These are probably the very best minimum out-of-pocket loans available.

 

Hands down — the VA loan is the BEST $0 down payment loan available today.

 

FHA

The Federal Housing Administration was created to help Americans become home-owners.   FHA lending guidelines are somewhat more flexible and allow credit scores at a minimum of 620.  The FHA doesn’t actually lend the money; instead, it insures the loan for the lender against default. FHA loans require only a 3.5 percent down payment. If a customer has a credit score greater than 680, it may make sense to explore conventional loan options since mortgage insurance and total monthly payments could be less than FHA.

 

Conventional — Fannie Mae and Freddie Mac

Today, if your home loan is not FHA or VA, then the only choice is Conventional Home Loan.  A conventional home loan is the standard for the industry and requires a minimum down payment of 5%.  If your down payment is between 5% to 19%, mortgage insurance will be required.  Remember, mortgage insurance protects the lender in case you default on the loan.

 

The Federal National Mortgage Association or “Fannie Mae” and the Federal Home Loan Mortgage Corporation or “Freddie Mac” are Government Sponsored Enterprises or private businesses sponsored by the US Federal Government that purchase loans that meet their lending criteria from mortgage lenders.  The primary reason these 2 companies were created by the US Government was to free up capital for banks or lenders so they could make additional loans to home buyers.  Fannie and Freddie are considered the “Investor” on the loan and do not have any interaction with the homeowner.

Willingness to Pay, Credit History and PMI

In most cases, regardless of the loan, a willingness to pay must be demonstrated by the buyer in one or more ways. For instance, if the property is going to be the buyer’s primary residence, he is more likely to pay because he will be living there. Credit history, income, assets and willingness to pay criteria will help the borrower to qualify for a loan with a lower down payment. Thus, it’s important to have a good credit history. Your debt-to-income ratio also has to meet the loan requirement.

 

 

Related –

Mortgage Basics, Ch. 3: Overcoming the down payment hurdle

Find Down Payment – Home Buying / Selling – About.com

Return of the 20% down payment? – 1 – saving for a home – MSN 

FCIC: How to Buy a Home With a Low Down Payment

Down Payment – The Mortgage Professor

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