Generally, homebuyers need to make a down payment of between 3 1/2 and 20 per cent of the home's purchase price. The down payment goes towards the purchase of the home and does not include standard closing costs such as lender fees, the appraisal or taxes and insurance. The precise amount of the down payment depends on the type of mortgage and the value of the home.
First time buyers
The Federal Housing Administration partners with banks to offer loans on which the borrower makes a down payment of just 3 1/2 per cent. The FHA requires 5 per cent downpayments on mobile homes in many areas, and borrowers with credit scores below 580 must make downpayments of at least 10 per cent on all FHA loans. Some lenders offer in-house mortgages designed for first time home buyers that are not insured by the FHA. The interest rates on these loans are typically higher than on FHA backed loans, and required downpayments are normally at least 5 per cent.
Conventional mortgages, also known as conforming loans, involve the homebuyer making a down payment of at least 20 per cent. On a £130,000 home that equates to a £26,000 down payment. Some lenders enable borrowers to take out loans with downpayments of between 10 and 15 per cent, but these borrowers must pay for Private Mortgage Insurance. PMI insures the lenders for the difference between 20 per cent of the property's value and the amount that the borrower made as a down payment. If the borrower defaults on the loan, the insurer pays the lender the insured amount.
The FHA and government sponsored mortgage company, Freddie Mac, announce maximum conforming loan limits every year. Loans that exceed the conforming limits are known as "Jumbo loans." As of 2011, in most parts of the United States, loans in excess of £271,050 are regarded as jumbo loans, although, in some areas, jumbo loans are loans in excess of £474,340. People who buy jumbo loans often have to make downpayments in excess of 25 per cent. A 25 per cent down payment on a £325,000 home equals £81,250.
Lenders can increase down payment requirements when the level of risk associated with borrower defaults rises. When home construction outstrips home demand, house prices begin to fall, and areas where this occurs are known as "depreciating markets" by lenders. During severe recessions, unemployment drives down home prices, and lenders can categorise whole states as depreciating markets. In a depreciating market lenders often require downpayments of 30 or 35 per cent, and down payment requirements on condominiums are often even higher.
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