Understanding Down Payments

Suppose you want to buy a house for $400,000. The seller gets $400,000.

  • If you bring $16,000 towards the purchase price, or put 4 percent down, the mortgage lender provides $384,000. Your down payment is four percent ($16,000 / $400,000) and the lender provides a 96 percent loan ($384,000 / $400,000).

  • If you pay $80,000 and the lender finances $320,000, your down payment is 20 percent and your loan is 80 percent.

Mortgage lenders often refer to the percentage of the purchase price that they finance as a loan-to-value, or LTV.

  • When you put $16,000 down on a $400,000 house, your LTV is 96 percent.

  • When you put 20 percent down on a $400,000 house, your LTV is 80 percent.

The term LTV is important because that is how lenders describe the maximum loan they will make.

Buying a home is a major financial decision — one of the largest you’ll likely make in your lifetime. A significant part of this process is saving up for a down payment. Many homebuyers will work hard and save for many years to build up their savings for this important purchase. But what amount is right for you? That all depends on the cost of the home you’re looking to buy and what your personal financial situation and goals are.

Going Conventional

The traditional down payment amount is 20%. For example, if the home you’re looking to purchase is $200,000, the down payment will be $40,000. Having this amount will save you from paying mortgage insurance, which is a fee that’s added to your monthly payments that protects lenders in case you’re unable to pay the mortgage. But what if you want to buy a home and don’t have the full 20% saved?

Options are available:

  • 97% Loan-to-Value (LTV) Option — A conventional mortgage in which your loan amount is 97% of the value of the home, and you only have to make a 3% down payment. Mortgage insurance will be required.

  • Lender-Paid Mortgage Insurance (LPMI) — If you can’t make the full 20% down payment, we may be able to pay your mortgage insurance for you. However, your interest rate will be slightly higher to cover this expense.

Going Government

The U.S. Government offers a variety of home purchase programs that help make homeownership possible for more people. These programs are offered through agencies such as the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA). Each of these agencies offers specific loan programs with different down payment requirements.

  • FHA Home Loan — A great option for first-time buyers and those with financial or credit setbacks. The required down payment amount is 3.5%, and a parent or relative can be a co-applicant on the loan with you. Mortgage insurance will be required.

  • VA Home Loan — As a benefit for your service to our country, the VA works with lenders to provide veterans a flexible solution for buying a home. You’ll get a competitive interest rate and don’t have to make a down payment unless you want to.