A down payment is a big factor in financing the purchase of a home. It is a portion of the purchase price of the property that you pay up-front to the lender using your own money. How much you put down can influence the total amount you can borrow. It also influences the size of your monthly mortgage payment, your initial loan balance, and whether or not you need Mortgage Insurance (PMI/MIP) on your mortgage.
Conventional loan programs are loans backed by Fannie Mae and Freddie Mac on the secondary market. As a home buyer, you do not work directly with these two Government Sponsored Enterprises, or GSE’s. Your lender will use Fannie and Freddie underwriting guidelines to approve your loan file. By using these Conventional guidelines, the lender will gain the blessing of Fannie and Freddie after the loan closes.
Why is this important? Because once the GSE accepts your loan on their books, the loan becomes insured (in essence) from default. Fannie and Freddie will insure up to 80% of the value of the home on a mortgage. This is why you will typically get the best deals and best pricing with a 20% down payment. 20% is the magic number. By the way, if you are an investor, the ‘sweet-spot’ for down payment typically shifts to 25% down.
What happens then on Conforming loans with less than 20% down? When the homeowner puts less than 20% down on a purchase, the lender will require some form of mortgage insurance. Mortgage insurance is provided by an independent 3rd party, not the lender or one of the GSE’s. The purpose of this mortgage insurance is to insure the portion of the loan that Fannie Mae or Freddie Mac do not insure. In other words, anything less than the 20% down payment.
So, if you put 10% down, Mortgage Insurance will be required for the remaining 10% gap between the 10% and 20% down payment. Make sense?
VA, FHA, and USDA loans have entirely different down-payment requirements than Conventional loans. Each loan program is underwritten according to its own guidelines. While there is significant overlap in the underwriting guidelines, the required down payments for each program can vary greatly.