How Much Down Payment
Aspiring homeowners often ask lenders about the minimum down payment requirements for a home purchase. While that is a critical question, it is worthwhile to ask a few additional ones to come up with the right pricing strategy for your situation.
When a buyer brings less than a 20% down payment on a conventional mortgage loan, there is an added cost known as Private Mortgage Insurance or PMI. This insurance may be added to the upfront closing costs or monthly payment, with the latter one as more common. This additional expense should be considered a component of your total pricing when shopping for a mortgage. What factors matter the most when it comes to interest rate and PMI cost? The two most important ones are your down payment amount and credit score.
Your down payment will greatly impact your loan’s interest rate and PMI monthly payment, as generally the less money you put down, the higher your PMI. While each person’s funds for the down payment, closing costs, and reserves may be different, in general, the sweet spot for a low down payment conventional mortgage is typically around 5%.
Your PMI may also significantly increase with average or below-average credit scores in the 600s. That’s why it’s important to consider where PMI cost falls in your overall buying strategy and review payment scenarios for different loan programs.
Another low down payment alternative to conventional loans are government-insured loans. While these loans do not require PMI, each has a variant of mortgage insurance to cover the risk for the loan insuring entity. Here’s a summary of the types of cost associated with each government loan*:
• VA loan** – With no down payment required, activeduty military personnel and veterans may qualify for a loan backed by the U.S. Department of Veteran Affairs. While they won’t have to pay PMI, a Funding Fee will be assessed and added as an extra cost.
• FHA loan – With a 3.5% down payment required, this loan may be a good choice for buyers with less-than-ideal credit scores. There is typically a lower minimum credit score requirement. In addition, pricing add-ons for lower credit scores are not as significant as compared to conventional loans. However, borrowers may expect an Upfront Mortgage Insurance Premium and an Annual Mortgage Insurance Premium as part of this loan.
• USDA loan – Income levels and geographic location are essential with this loan. With no down payment required, low-to-moderate income buyers may use this loan to purchase in rural areas. For Honolulu County, a qualified household size of one to four people can have a maximum total annual household income of $144,750. The loan requires an upfront guarantee fee and an annual guarantee fee that impacts the cost and monthly payment.
Hawaii’s high cost of real estate makes accumulating any amount of down payment a challenging task. However, getting additional insights into your situation and setting a mortgage financing strategy in place with a knowledgeable mortgage professional may have significant benefits over the long term. To discuss your loan options and get answers to any mortgage-related questions, contact one of our loanDepot Loan Consultants today.
• loanDepot.com, LLC is not acting on behalf of or at the direction of HUD/FHA or the federal government. **Subject to VA Eligibility
Jason Martinson
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Area Manager
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jmartinson@loandepot.com
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Honolulu, Hawaii 96813
