Understanding the Down Payment

A down payment on a loan is usually required by lenders to be sure that a borrower has a sufficient personal investment in a home to keep the loan on that home current. A borrower with no down payment invested in a home may be more likely to stop making loan payments and give the property Back to the lender if any financial difficulty arises than a borrower with a substantial amount of equity in the home.

The amount of the down payment is based on the individual program and investor (for example, Fannie Mae or Freddie Mac) requirements. Some loan programs, such as VA loan programs, do not require a down payment, but usually a minimum of 3%-20% is required. For example, many FHA programs allow for 3% down and most conventional programs require at least a 10% down payment.

A down payment may or may not be a hurdle to buying a home. Loans and gifts can help with your down payment in some programs but not all. Specific requirements of some programs disallow or severely curtail down payment gifts. Some FHA loan products allow a gift for the entire amount of the down payment. A relative or some other non-profit foundation (but not an interested party to the transaction, such as the home builder or seller) may be able to assist with the down payment.

There are many non-profit organizations and local bond-funded development programs dedicated to helping home buyers with their down payment. Most of these organizations never require the borrower to pay back the funds as long as the borrower meets the criteria for the grant, such as living in and maintaining the home for a specified period. The only drawback is that there are qualification guidelines that differ by organization. For example, there may be income, asset or geographic restrictions and even required home ownership counseling classes. Most lenders or realtors are aware of the organizations like this in their area, and may be able to help you locate one.


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