When purchasing a home, one of the main requirements is a down payment. Essentially, this is the initial cash outlay homebuyers makes to secure a loan for the purchase of a house. Historically, in conventional lending, this down payment is typically 20 percent of the house’s purchase price. Lenders have used this rule-of-thumb as an informal means to determine a person’s ability to fulfill their financial liabilities or, more generally speaking, as a measure of their creditworthiness.
While it is entirely possible to secure a loan with a lower down payment (i.e., 10 percent, 15 percent, etc.), it’s usually to a borrower’s benefit if they can make a higher initial down payment. In other words, the higher the down payment, the more likely a person will secure a loan from a lender for the remaining balance.
Benefits of Higher Down Payments
Some benefits to putting more upfront cash down on a home mortgage include lower closing fees, greater “equity” (i.e., the dollar value of ownership in the purchased home), and lower monthly payments.
Regarding the latter, a borrower placing a 10 percent down payment (i.e., $12,500) on a $125,000 home mortgage loan, with a traditional 30-year, 4 percent, fixed-rate loan, would have an estimated monthly payment of $537 per month. By comparison, this person placing a 20 percent down payment (i.e., $25,000) on the same $125,000 loan, would have a lower estimated monthly payment of $477. The higher down payment results in a lower monthly obligation ($60 less) for the borrower and a much-lower financial risk to the lender – $100,000 loan with 20 percent from borrower versus a higher $112,500 loan with only 10 percent from borrower.
FHA versus Conventional Loans
For those borrowers who are unable to purchase a home using conventional lending methods, there is assistance from the U.S. federal government – specifically, the Federal Housing Administration (FHA). The FHA makes it possible for borrowers to secure mortgage loans with as little as 3 percent to 3.5 percent down. Other things factor into the down payment requirements for FHA loans that could result in zero percent down payments – things like geographic location (i.e., rural areas of the country), active or retired military service, or obtaining loans through the Veterans Administration (VA).