Minimum Down Payment

What Is a Minimum Down Payment?

The minimum down payment is the cash contribution that a borrower must provide when they purchase a home. Many mortgage loans will require such a minimum, and 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. Some VA loans may not require a minimum 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.

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 (or through a down payment assistance program) 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%, 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.

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.