A Review of Down Payment Minimums

In light of the recent Fannie Mae decision to raise the minimum down payment, now is a good time to review the minimum down payments for the major program options you will likely use to finance your new home.

No one program is better than any other, and each has advantages above and beyond your down payment minimums.

FHA

With the exception of VA loans, FHA has the lowest down payment of any residential mortgage program, at 3.5 percent. Keep in mind that with FHA there is an upfront mortgage insurance premium; however, you will be happy to know you will be able to finance it – have it added to the mortgage.

Even better, you will still have to put down only the 3.5 percent, even when the mortgage insurance is rolled into your loan. The final loan-to-value ratio can in fact be greater than 96.5 percent – currently the FHA doesn’t have a problem with this.

Conventional mortgages

Fannie Mae and Freddie Mac recently raised their minimum down payments from 3 to 5 percent, so you can expect to put down a bit more than you may have in the past. However, when you consider the minimum down payments of decades ago – when borrowers had to be prepared to put down 20 percent or more before they could even consider purchasing a home – 5 percent is still relatively low.

VA mortgages

Veteran’s Administration (VA) mortgages are the only true zero-percent-down payment mortgages available in today’s marketplace. Active and retired military need to have their eligibility verified by the VA.

In all cases

No matter what the program, down payment funds may only come from your own personal funds or funds that have been gifted to you by a close relative, and they must be verified.

Other Expenses

You may assume that your down payment is the only money you are going to invest in the transaction, and this is far from true.  There are other costs that must be paid on closing.

Depending on what program you select, you will have to demonstrate during the process or at the closing table that you have sufficient funds for either closing costs, reserves, or both.

Asset requirements

FHA has no asset reserve requirements, but Fannie Mae does. Regardless of the type of closing costs and reserves involved (and depending on your state), you may have to provide property tax reserves at closing. Often the seller will credit back some of these at closing, but lenders may disallow the use of this specific credit when initial numbers are calculated.

Your also should be aware that, in this market, the seller closing cost credit can be an invaluable tool to help reduce the out-of-pocket expenses that you will have during the home purchase process. However, you also should realize that seller credits – even very large ones – can be used only for closing costs and reserves.

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