Do I have to make a down payment?

Nov 28, 2022 Keith Gumbinger,HSH.com

Q: The home I am buying was listed for $269,900. I offered $275,000 to win the bid. The home was appraised for $270,000. I was approved for a loan of $270,000 before the appraisal. Do I still need to come up with a down payment if the approved loan amount is the same as the appraised value?

A: Yes, you will still need to come up with a down payment from your own funds.

Loans made at 100 percent of the value of the home are very rare nowadays, mostly limited only to certain audiences eligible for financing though the VA and USDA loan programs. There may also be special programs run or offered by state agencies that can allow a first-time homebuyer a chance to buy a home with no money down, too.

In general, you'll need to put down a minimum of 3.5 percent of the purchase price (for an FHA-backed loan) or usually 5 percent for conventional financing. That said, Fannie Mae and Freddie Mac offers programs aimed at low- and moderate income buyers that allow for as little as 3 percent down, carry reduced mortgage insurance costs and may be available with reduced loan fees, too. These compete against the FHA program; to see how these "Home Ready" and "Home Possible" programs compare with FHA, use HSH's FHA Loan Calculator and Low Down Payment comparison tool.

Certain issues in a borrower's profile (like a low credit score, for example) may see the lender require a larger down payment to help offset the risk that a low score or weak credit history presents.

An downpayment example…

The lender will generally allow you to borrow ("leverage") the home up to a given level; in this instance, if the value of the home is $275,000 and the lender will lend you up to 90 percent of the value of the home, you'll need a down payment of $27,500 (a 10 percent down payment, 90 percent loan-to-value loan, leaving a mortgage amount of $247,500). If the lender is able to offer you 95 percent financing, you'll need to come up with a 5 percent down payment of $13,750 -- leaving a $261,250 loan amount.

Be prepared to pay mortgage insurance

In all cases, down payment amounts of less than 20 percent will require mortgage insurance, which will affect your mortgage costs and the amount of money you can borrow.

Depending upon your situation and how long you think you'll be in the home, it can be beneficial to put more (or even less) down, since this has an impact on the cost of your PMI. To help you decide what size down payment will have the best outcome for your situation, you'll want to use HSH.com's Down Payment Decisioner Calculator. This unique tool can help you to see how mortgage interest and mortgage-insurance costs are affected by the size of your down payment choice both today and in the future, and help you choose the overall lowest cost option.

Why are down payments required?

Financing at the 100 percent level -- where the borrower has "no skin in the game" -- was among the gimmickry that contributed to the most recent housing market crash. Borrowers who don't put any of their own money into the transaction have nothing to lose, and are less likely to want to keep making payments if things become economically difficult for them. That puts the lender at risk of loss, and that is why a minimum down payment is required today.