Mortgage Loan Down Payments -- What is the Best Down Payment for Me?

Choosing a Mortgage Down Payment

To decide how much your home mortgage loan down payment should be, you should consider your financial situation (income and savings), the home loan you can get, the cost of your home, and your preferences as far as building equity and the total length of the loan. If you are financially secure (be honest with yourself), you'll probably want to put down 20% of the home's purchase price (or more, if possible). If your current situation doesn't favor a 20% down payment, there are options for getting a mortgage with a lower down payment, albeit with some trade-offs.

Down Payments and Private Mortgage Insurance

Although many lenders require you to make a down payment of 20 percent of the home’s purchase price, some lenders do offer home loans with a down payment of less than 20 percent. If you do get a mortgage with a less than 20% down payment, the lender will usually require you to buy private mortgage insurance, or PMI, to protect the lender by covering some of the cost of your mortgage in case you're unable to make your payments. Statistics show that a borrower with less than 20% invested in a house is more likely to default on a mortgage than someone with 20% or more as a down payment.

The Piggyback Mortgage Loan

One option for putting less than 20% as a down payment is to get a piggyback loan, also known as an "80/10/10" (or other combinations). In this example, the "80" represents the 80% of the home's value that is financed through the primary or "1st" mortgage, the "10" represents your 10% down payment and the 2nd "10" is where the "piggyback" comes in -- it is a 2nd loan that is specifically used to cover a 10% portion of your home's value.

FHA Home Loans

The Federal Housing Authority (or FHA) offers mortgage programs with less than 20% down payment requirements. The FHA has offered mortgages with down payments as low as 3.5% for qualified buyers. Due to the subprime mortgage crisies, the FHA received millions of applications for special mortgages and helped tons of borrowers buy homes, often allowing a low down payment.

How to Get an FHA Home Mortgage Loan

Applying for an FHA loan isn't difficult, and the parameters for those who qualify are fairly straightforward. Start by calling a mortgage broker or an FHA-approved lender. You can search for an FHA lender on the Web site of the U.S. Department of Housing and Urban Development.

For lenders, income is the main factor in determining who qualifies for an FHA loan. The agency's guidelines dictate that that buyers spend no more than 31% of their gross income on mortgage payments. In addition, the interest rates that FHA borrowers get are not actually based on their FICO credit scores (as they would with most standard mortgage loans), but are calculated along the same lines as what any typically approved borrower would receive with a good credit score. The only piece of "fine print" here is that borrowers with a FICO score of 500 or lower will usually have to put 10% down instead of 3.5%.

Mortgage Loan Down Payment Calculator

Here is a helpful mortgage down payment calculator from bankrate.com to help you figure out the ideal down payment based on the home's purchase price, taxes & more:

Down payment calculator

Summary

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references: ftc.gov; money.cnn.com; loan.yahoo.com