Loan Prequalification – Down Payment

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blog-author-clayjeffreys3

Continuing a series on the loan prequalification process. Last week we discussed minimum credit scores. Today, we will focus on several aspects of the down payment including the minimum amount, getting rid of PMI, best interest rate, and using gift money for the down payment. Let’s get started!

Depending on the loan program, the minimum down payment is 3.5% or 5%. FHA loans only require 3.5% down versus a conventional loan that requires 5% down. What does that extra 1.5% get you? If you have good credit, the monthly private mortgage insurance (also known as PMI) payments on conventional loans will be half as much as the monthly PMI payments on FHA loans. If you have average/fair credit, monthly PMI payments on conventional loans are still about 35% less than FHA loans. In short, coming up with enough to get a 5% down payment could save you big time when it comes to PMI payments. Speaking of PMI…

Obviously avoiding PMI is ideal. To get rid of PMI, for most loan programs, you’ll need a 20% down payment. With a 20% down payment on a conventional loan, you’ll avoid PMI entirely. Ironically, FHA loans still require monthly PMI for 5 years even with a 20% down payment.

We’ve crossed two tiers… the minimum needed and getting rid of PMI. What about the down payment amount needed to get the absolute best rate possible? Interest rates are tied to a combination of a borrower’s credit score and down payment. On the down payment portion, a 5%, 10%, 15% and 20% all come with the same interest rate. To get a lower rate, you’d need a 40% down payment. That would lower the interest rate at least 0.125%, and possibly as much as 0.250%.

Lastly, what about borrowers who are receiving a gift from a family member for the down payment? Is that allowed? Yes, it is absolutely allowed. The gift can be for the minimum down payment requirement OR can be combined with the borrower’s own assets to make a larger down payment. So long as the money is documented from an acceptable source, it can be used.

If you are looking to purchase a home in the state of Georgia, contact me today. Not only can I help you get prequalified, I can also talk about the numbers when making different down payment sizes to figure out if it makes more sense to make a larger down payment with a smaller amount of cash left over OR make a smaller down payment to have more cash on hand after closing.

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