Minimum Down Payment

The minimum down payment is the cash contribution that is required to come from a borrower’s own funds when they purchase a home. The actual amount required varies by loan program, but the standard minimum down payment required for a conventional loan is 20 percent, and it is 3.5 percent for an FHA loan.

Minimum down payment amounts are required to offset 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, which are backed by various lending institutions, this amount is generally 20 percent, which will be 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.

An example of a 'Minimum Down Payment'

Consider for example that Mary Smith is looking to purchase a home. She has received a 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 percent of that purchase price, or $280,000. That means she will need to come up with 20-percent, or $70,000 of her own funds to close on the loan.

Imagine Mary’s mortgage again, but this time using FHA guidelines. Instead of borrowing 80 percent of $350,000, she is now able to borrow up to 96.5 percent, or $337,750. That means Mary now only needs to come up with 3.5 percent 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 .3 and 1.5 percent of the original loan amount and is based off several factors, including credit score and loan to value ratio. This premium is required be escrowed into the monthly payment.

There are many factors to consider when deciding which type of loan program to pursue, including qualification requirements for each. 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 to depending on what their lenders minimum loan amount requirements are. The decision should be based off what a borrower can afford and what they feel is their best option.

As of 2018, the mortgage insurance premium is a tax-deductible expense.