Quick Answer: 3% minimum with an FHA loan, 3% to 5% with a conventional loan and no down payment at all with a VA loan. PMI scenarios are laid out to the right.
The traditional way to purchase a home is to save at least 20% of the sales price to use as your down payment. This demonstrates a level of investment in the home that makes banks comfortable enough to lend you the remaining 80% of the purchase price. Though there are many popular options to put less money down, the full 20% or more will get you the best interest rates available.
With that said, a huge amount of people would not be able to purchase homes if they had to come up with 20% to put down. In the 1950’s, banks addressed this concern by allowing homebuyers to make smaller down payments. Because these banks were taking greater risk than they were used to, borrowers were required to pay Private Mortgage Insurance – or PMI for short.
PMI simply provides coverage for banks against losses taken during foreclosure. If a bank has to foreclose on a property because the borrower stops making payments, the bank has to try to sell the property to make their money back. If the borrower didn’t put much money down in the first place, it’s possible the bank would have to sell the property at a loss, especially given the payments they missed out on from the borrower.
The common complaint about traditional PMI (read further for newer, more flexible PMI options) is the cost. Though it gives the homebuyer the option to put just a small amount down, the monthly PMI payments can be expensive.
An alternate option, developed within the last 20 years, is based on the idea of making a small down payment on a conventional mortgage while avoiding PMI altogether. Instead of taking out one loan, a homebuyer can take out two – a ‘first’ mortgage to cover 80% of the purchase price and a ‘second’ mortgage to cover the remainder. If the homebuyer wants to put 10% down, while avoiding PMI, they can take out the primary loan for 80% and a secondary loan for 10% - this is often called an 80/10/10. Alternately, if the buyer were to put five percent down, it would be called an 80/15/5. The rate on the secondary loan is always higher than the rate on the first, because, in the case of foreclosure, the first loan is given precedence over the second when it comes time to pay off the balances.
For a long time, I advised borrowers putting less than 20% down to take out two loans because it was less expensive than the alternative. However, rates on second mortgages have risen and their availability has diminished as the mortgage market has tightened down. Also, PMI has become much more competitive and flexible, allowing new, less expensive ways to satisfy PMI requirements. I am now a strong believer in the new PMI programs offering the best bottom line deal to my clients. 80/10/10's and 80/15/5's simply cannot compete any longer.
Lender Paid Mortgage Insurance allows your mortgage bank to pay a one time PMI premium on your behalf at closing. In exchange for a slightly higher rate, you never have to worry about making expensive monthly PMI payments. Despite the higher interest rate on your loan, it almost always ends up being less expensive than monthly PMI or doing two loans. You can also opt for a 'split premium' PMI plan where the bank pays a one time premium on your behalf and you make a deeply discounted monthly PMI payment. Like Lender Paid Mortgage Insurance, this also raises your rate slightly, but the bottom line payment ends up much better than paying traditional monthly PMI. This 'split premium' option has lately been the most cost-effective.
FHA has it's own PMI system that is the same on each FHA loan. You pay a small monthly PMI premium in addition to a one time premium that is added onto your loan balance at closing. Read more about FHA loans here.
A VA mortgage allows you to put no money down and have no PMI. There is a 'funding fee' on top of your loan amount, but the lack of PMI is another reason why, if you are a qualified veteran, there is no better mortgage program available. Read more about VA loans here.
Obviously every client deserves a customized set of numbers for all the options out there, but I felt going through each program would help you navigate the process more effectively. Many loan officers will offer you a low money down conventional loan at an attractive interest rate, without telling you about the monthly PMI payment. Also, some companies simply cannot offer Lender Paid Mortgage Insurance. Watch out for points and fees as usual – check out my article on comparing mortgage offers for more details.
Overall, I want to convey the flexibility you have regarding down payments. Contact me anytime for a personal consultation.
* I’m going to quote rates based on 11/12/2008. I’ll do my best to update the information as rates change, but please understand that they do change daily. You can always ask for a quick quote to receive the most accurate, up to date rate information. Also, the loan programs quoted are all conventional 30-Year Fixed programs.
