September 13, 2017 in Mortgages

Mortgage down payment: What it is, who it goes to and where it comes from

What is a down payment on a home?

The down payment is money you give to the home’s seller. The rest of the payment to the seller comes from your mortgage. Down payments are expressed as percentages. A down payment of at least 20 percent lets you avoid mortgage insurance.

To explain how bankers and real estate agents talk about down payments, let’s say you buy a house for $100,000:

Sometimes you’ll hear a phrase like, “Alex put 20 percent down on the house.” That means that Alex made a 20 percent down payment.

The money for a down payment can come from:

Why down payments are required

When you make a down payment, you risk losing that money if you can’t make the house payments and end up in foreclosure. This gives you an incentive to make your mortgage payments. That’s why the lender requires a down payment.

Minimum down payments

Most mortgage lenders require a down payment of at least 3 percent. FHA loans (mortgages insured by the Federal Housing Administration) require a down payment of at least 3.5 percent. Depending on your credit history, the type of dwelling and your reason for buying, the minimum down payment could be 5 percent, 10 percent, 20 percent or more.

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A few limited mortgage programs require no down payment or a very small one.

Down payment and mortgage insurance

When you make a down payment of less than 20 percent, you must buy mortgage insurance. There are two main types:

Fees for small down payments

In many cases, lenders charge fees to borrowers who make down payments of less than 20 percent. Those fees are on top of mortgage insurance premiums. The smaller the down payment, the higher the fees, which are paid at closing. Sometimes the lender charges a higher interest rate in lieu of the fees.

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Bigger down payment = more house

Finley and Kerry each can afford to spend about $925 a month on a house payment, excluding taxes and homeowners insurance. Kerry has $15,000 more saved for a down payment and can afford to spend about $32,000 more for a house.

Smaller vs. larger down payment

Homebuyer House price Down payment amount Percent down Monthly principal and interest Monthly PMI Total monthly payment
Homebuyer: Finley House price: $167,667 Down payment amount: $5,000 Percent down: 3 Monthly principal and interest: $776.60 Monthly PMI: $149.11 Total monthly payment: $925.71
Homebuyer: Kerry House price: $200,000 Down payment amount: $20,000 Percent down: 10 Monthly principal and interest: $859.35 Monthly PMI: $66 Total monthly payment: $925.35

Assuming a 4% interest rate.

Source: Bankrate.com, Radian mortgage insurance calculator