What a down payment on a home is, who it goes to and where it comes from

    Horizontal view of couple analyzing family bills; Shutterstock ID 220991617; PO: Cat Overman; Job: blog post

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

    • A 3% down payment means that you pay the seller $3,000 and you borrow $97,000. RATE SEARCH: Find a low down-payment mortgage today.
    • With a 20% down payment, you would pay the seller $20,000 and you would borrow $80,000.

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

    The money for a down payment can come from:

    • Your own savings.
    • The money you get when you sell a house.
    • Gifts and grants from family, employers and nonprofits.

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

    RATE SEARCH: Shop today for an FHA loan.

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

    When you make a down payment of less than 20%, you must buy mortgage insurance. There are 2 main types:

    • Private mortgage insurance, often called PMI, is paid to an insurance company. Most PMI premiums are paid monthly. They’re called annual premiums, even though they’re paid every month. Most insurers offer the option of an “upfront premium” — a big payment at the beginning of the loan.
    • FHA insurance is paid to the federal government. When you get an FHA-insured mortgage, you pay for an upfront premium plus monthly premium payments.

    Fees for small down payments

    In many cases, lenders charge fees to borrowers who make down payments of less than 20%. 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
    Finley $167,667 $5,000 3 $776.60 $149.11 $925.71
    Kerry $200,000 $20,000 10 $859.35 $66 $925.35

    Assuming a 4% interest rate.
    Source: Bankrate.com, Radian mortgage insurance calculator

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