Minimum Down Payment

Minimum Down Payment

The minimum down payment is the cash contribution that a borrower must provide from their own funds when they purchase a home. These loans require payment of a non-tax-deductible monthly mortgage premium known as mortgage insurance to offset the low down payment. The actual amount required varies by the loan program, but the standard minimum down payment required for a conventional loan is 20% and 3.5% for an FHA loan. Government-backed loans, also known as FHA mortgages, offset this risk by collecting a monthly mortgage premium known as mortgage insurance or MI. The monthly mortgage insurance premium rate varies between 0.3% and 1.5% of the original loan amount and is based on several factors such as the borrower's credit score and loan-to-value ratio.

The minimum down payment is the cash that a buyer is required to provide to qualify for a mortgage loan.

What Is a Minimum Down Payment?

The minimum down payment is the cash contribution that a borrower must provide from their own funds when they purchase a home. The actual amount required varies by the loan program, but the standard minimum down payment required for a conventional loan is 20% and 3.5% for an FHA loan.

The minimum down payment is the cash that a buyer is required to provide to qualify for a mortgage loan.
For a conventional loan, the down payment is typically 20%, while for an FHA loan, it is typically 3.5%.
The down payment is designed to offset the risk to the lender.
FHA loans are government-backed loans. These loans require payment of a non-tax-deductible monthly mortgage premium known as mortgage insurance to offset the low down payment.

Understanding a Minimum Down Payment

Minimum down payment amounts are required to offset the potential risk to a lender. The theory is that a borrower will be less likely to default on a loan when they have made a large cash contribution to the mortgage themselves.

For conventional loans that are backed by various lending institutions, this amount is typically 20%, which is due at the signing of the closing documents. Government-backed loans, also known as FHA mortgages, offset this risk by collecting a monthly mortgage premium known as mortgage insurance or MI.

As of June 2021, the mortgage insurance premium is not a tax-deductible expense.

Example of a Minimum Down Payment

Consider, for example, that Mary Smith is looking to purchase a home. She has received preapproval for a $360,000 mortgage and has found a home that she would like to buy. The purchase price is $350,000. With a conventional mortgage, Mary will be able to borrow up to 80% of that purchase price, or $280,000. That means she will need to come up with 20%, or $70,000 of her own funds to close on the loan.

If we look at Mary’s mortgage again (this time using FHA guidelines), we see that instead of borrowing 80% of $350,000, Mary can borrow up to 96.5 percent, or $337,750. That means Mary now only needs to find 3.5% of $350,000, or $12,250.

However, now Mary will be required to make a monthly mortgage insurance payment in addition to paying principal, interest, taxes, and insurance. The monthly mortgage insurance premium rate varies between 0.3% and 1.5% of the original loan amount and is based on several factors such as the borrower's credit score and loan-to-value ratio. This premium is escrowed into the monthly payment.

The minimum down payment typically required for a conventional mortgage loan.

There are many factors to consider when deciding which type of loan to pursue, including the qualification requirements. However, one thing remains the same, the minimum down payment is just that, a minimum. A borrower can choose to put as much or as little down as they would like depending on their lender's minimum loan amount requirements. The decision should be based on the amount a borrower can afford and what they consider to be their best option financially.

As of June 2021 the mortgage insurance premium is not a tax-deductible expense.

Related terms:

Conforming Loan

A conforming loan is a home mortgage with underlying terms and conditions that meet the funding criteria of Fannie Mae and Freddie Mac. read more

Conventional Mortgage or Loan

A conventional mortgage is any type of home buyer’s loan not offered or secured by a government entity but instead is available through a private lender. read more

Credit Score: , Factors, & Improving It

A credit score is a number between 300–850 that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders. read more

Default

A default happens when a borrower fails to repay a portion or all of a debt, including interest or principal. read more

Down Payment

A down payment is a sum of money the buyer pays at the outset of a large transaction, such as for a home or car, often before financing the rest. read more

Escrow : Types, Examples, Pros & Cons

Escrow broadly refers to a third party that holds money or an asset on behalf of the other two parties in a transaction. read more

Federal Housing Administration (FHA) Loan

A Federal Housing Administration (FHA) loan is a mortgage insured by the FHA that is designed for home borrowers. read more

High Ratio Loan

A high-ratio loan is a loan whereby the loan value is close to the value of the property being used as collateral, a loan value that approaches 100% of the value of the property. read more

Loan-to-Value (LTV) Ratio & Formula

The loan-to-value (LTV) ratio is a lending risk assessment ratio that financial institutions and other lenders examine before approving a mortgage. read more

Mortgage Insurance

Mortgage insurance protects a mortgage lender or title holder if a borrower defaults on payments, dies, or otherwise can't pay the mortgage. read more