The Top 12 Mortgage Questions, Answered
If you are like most people, the thought of dealing with home financing can be pretty scary. A lot of times, a person’s previous experience with mortgage transactions isn’t even enough to offset that fear. Mortgage transactions, home loans, and the lenders that home buyers and homeowners have to deal with are all tough subjects for anyone who isn’t a part of the home finance industry.
It only makes sense, seeing as mortgages are such large investments. In fact, mortgages are so large that the average person only really gets through about two of them in a lifetime-- and there are still plenty of home buyers who are a part of the “one-and-done” group. It also doesn’t help that the mortgage industry is full of confusing terms, strict eligibility requirements, and lengthy contracts for average people, who typically know nothing about the industry. At the end of the day, home buyers and even some homeowners are left with more questions than answers.
It isn’t anyone’s fault, either. A mortgage transaction is usually a long process that doesn’t always go smoothly. During that time, plenty of questions are asked and while many are answered, the focus is almost always on completing the transaction with the most financially beneficial terms for all parties involved.
Even before a transaction begins, many potential home buyers have almost nowhere to turn when it comes to what to expect out of a mortgage transaction. Many home buyers turn to their real estate agents, but again, a lot of the time the information they are given is only half true or is more self-serving than anything else. Believe it or not, the majority of first time home buyers go into a mortgage transaction completely void of what to expect from a mortgage transaction and sometimes even homeownership in general.
These same home buyers often become homeowners, and it usually works out in most cases. True, some fall victim to predatory lending or simply bite off more than they can chew, but a lot of them are successful in purchasing a home at a decent enough rate. The problem is that when it comes time to refinance or purchase a new home, they are right back at square one, trying to forge a path forward with a substantial lack of knowledge, and the confidence to match.
All it takes is a simple google search of any mortgage related question, and soon you will find that the rabbit hole of what the average people want to know about mortgages, lenders, and mortgage transactions goes pretty deep, and can include some of what people in the industry would assume to be pretty obvious. At home.loans, we’re all about the education of home buyers and homeowners, so we figured that we might be able to help in this area. We decided that a good place to start would be to round up the most frequently asked mortgage-related questions that people are asking, and answer them all in as much detail as possible.
So, without any further adieu, here are the top 12 mortgage questions, and the home.loans answers to them all!
1. How Did The Lender Come Up With My Mortgage Interest Rate?
Mortgage interest rates are arguably the most talked about aspect of home loans possibly ever. The interest rate that a borrower is charged is the cost of borrowing the sum of money that makes up the principal of a loan. On a mortgage loan, borrowers must be aware of not only the interest rate on the principal balance, but also the annual percentage rate (APR), which is a better representation of the cost of the home loan. The APR tells a borrower the full cost of a mortgage once all of the additional and associated fees and costs are factored into the equation.
As it pertains to borrowers, APR should receive most of the focus. Luckily, most mortgage loans are advertised based on the APR thanks to the Truth in Lending Act. Those that aren’t advertised based on APR must still disclose a loan’s APR to borrowers well in advance of finalizing any loan agreement. But the question at hand is how this rate is decided.
It’s important for mortgage borrowers to know how interest rates are set before considering potential lenders. As it turns out, there are several factors that can affect the market interest rates for mortgages. Such factors as the prime rate (the rate at which reputable banking institutions lend money to their best clients) and the general state of the economy play a role in the determination of the mortgage market interest rates, and even the supply and demand for mortgages between lenders and investors.
Still, one of the biggest determining factors for mortgage rates is the volatility of the 10-year treasury bond yield. Lenders often make the comparison between mortgage loans and these 10-year bonds, because while most home loan products are packaged as 30-year mortgages, the average home loan is refinanced or paid off within 10 years. This makes the 10-year treasury bond a great standard of comparison when it comes to mortgage interest rates.
Once lenders have a decent starting point for an APR, the real fun starts. It is all too common for borrowers to see mortgage rates advertised at a certain amount, only to be quoted a different amount when they decide to work with that lender. Some even feel as though the advertisements are misleading, or even predatory.
In most cases, that isn’t true at all. You see, when it comes to mortgage loans, many lenders practice what is known as “risk-based financing”. In a nutshell, the higher risk a borrower is assumed to be, the higher rates and fees the lender will charge that borrower. Before getting into detail about what that really means, it is important to note that there was a time (roughly around the early 2000s) when risk-based financing wasn’t really a thing, and let’s just say the economy took some pretty huge hits that we are still feeling the effects of to this day.
Either way, lenders today tend to focus on the risk involved with loaning a borrower money in order to determine what rate to charge them (if they are eligible for a mortgage in the first place). In order to determine the mortgage rate that a borrower should be charged, lenders look at various risk factors associated with the borrower, starting with their credit history and their current financial situation.
One of the heaviest determining factors of borrower’s interest rate is their credit score. In fact, that three digit number assigned to most people with a bank account plays a huge role in the assessment of a borrower’s risk. Higher credit scores, in most cases, relate to more flexible mortgage rates, but credit scores are still only a piece of the much larger puzzle.
Another huge determining factor of risk and by extension the interest rate charged on a mortgage loan is the loan to value ratio (LTV). There are very few loan programs that do 100% financing on a mortgage, so, in most cases (especially when it comes to conventional financing) a down payment must be made to show that the borrower is willing to make an investment of their own money in the home purchase, effectively giving them something to lose should they default on the home loan. The down payment offsets the principal amount, and the relation between the two is typically expressed as a percentage known as the LTV.
Basically, the higher the down payment made, the lower the LTV, which correlates to less of a risk for the lender, who then charges the borrower a better rate. The converse is also true, where less of a down payment leads to a higher interest rate. But even then, these aren’t the only factors to consider. The purpose of the property being purchased plays a role as well.
Did you know that lenders have different classifications for home purchases? Interest on mortgages can differ simply based on what a home buyer will do with the property. Lenders charge higher rates for second or “vacation” homes than they do for a primary residence, and even more for an investment property.
Financing for a multi-unit property typically comes with a higher interest rate than for a single-unit dwelling. The same goes for a condo. You might be surprised how every little detail matters when lenders are trying to determine what rates to charge borrowers.
Some lenders try to assess the affordability of a home loan by weighing the monthly debts a borrower would have with the mortgage against their gross monthly income. The scrutinization of debt-to-income ratio (DTI) may seem like a bit much, but it might actually prevent some borrowers from getting loans that they ultimately wouldn’t be able to afford. And trust us, the list just keeps going -- even the loan amount is a risk factor.
All in all, you have to understand that a lot goes into the interest rate that a lender is willing to charge. The two areas of the most importance to this process would be a borrower’s credit history and financial situation and the details of the mortgage loan arrangement. The details in the risks found in both of those areas are ultimately the deciding factors of what interest rate is charged to a borrower.
2. How is a Mortgage Payment Calculated?
Monthly mortgage payments are a huge point of concern for home buyers and homeowners alike. Needless to say, it’s extremely important for a home buyer to know what they will have to pay for their home loan each month, just as it is prudent for any homeowner to know what comprises that monthly payment that many people tend to dread. Monthly mortgage payments are not nearly as simple as people assume.
A monthly mortgage payment starts with the principal loan balance that must be repaid, divided up into installments for each month of the loan term. Added to that is the interest on the mortgage loan, the cost of borrowing, so to speak. The interest rate (APR) is a percentage of the mortgage amount that is also divided into monthly installments.
Now, the average person would assume that’s where it ends, but there is so much more to factor into the equation. Monthly mortgage payments are more than just principal and interest. As a matter of fact, there is a helpful acronym that home buyers would do well to remember in order to fully comprehend the cost of homeownership.
In the simplest of terms, mortgage payments are made up of principal, interest, taxes, and insurance, or PITI. Sure, the principal amount is obvious, but once you factor in APR and the costs associated with homeownership, there could be a difference of hundreds of dollars. For better or worse, we can comprehend principal and interest, but what of the other two components?
The payment of taxes, by now, should never be even remotely shocking to the average American. In terms of homeownership, the taxes in question are property taxes. No home or piece of land for that matter can be purchased without being taxed. Property taxes aren’t a standard calculation either, rather, they are determined and levied on properties at the local government level, in order to provide funding for necessary community functions.
For the insurance portion of PITI, there are actually two different kinds of insurance to take into consideration. The one that all homeowners must be responsible for is homeowners insurance. The other type of insurance, mortgage insurance, depends on the type of loan a borrower gets, and the down payment they are able to make.
Homeowner’s insurance is typically a requirement for a mortgage transaction. Homeowner’s insurance is a type of insurance policy that covers a homeowner in the event of losses or damages to the individual’s home and assets within the home. Lenders do not particularly care that their borrower’s property is insured, but they do care that their investment is insured.
As such, homeowner’s insurance is almost always a requirement for buying a home. This type of coverage comes in many forms, and can include many areas of protection, at various costs. Most of the time a homeowner gets to shop around for better quotes and lower premiums on their homeowner’s insurance, but it is a standard part of a monthly mortgage payment.
As for mortgage insurance, there are two types of mortgage insurance, and not all borrowers are required to pay either of them. Home buyers who opt for an FHA loan to purchase their home must pay mandatory mortgage insurance premiums (MIP) in the form of a one-time upfront fee and an annual fee paid each month. Borrowers with conventional loans who failed to make a down payment of at least 20% may be required to pay private mortgage insurance (PMI), which is usually paid in installments over the loan term until there is at least 20% equity in the home.
The taxes and insurance portions of PITI can be paid separately from a monthly mortgage payment if the home buyer chooses to do so. Still, they remain a part of the PITI calculation because in most cases, these fees are worked into and collected from the monthly mortgage payment amount, and divided into an escrow account to be paid at the appropriate times when they are due.
Homeowners association dues may not be a part of PITI, but they’re generally a large factor when discussing the costs of owning a property, and shouldn’t be overlooked. Properties that are a part of a homeowners association typically require assessments known as HOA dues to be paid by homeowners each month. These dues help fund the association in the performance of its duties.
Of course, homeownership does come with additional costs, such as maintenance and utilities. Still, these are not typically factored into the monthly mortgage payments while all of the elements that make up PITI are. To accurately calculate a monthly mortgage payment, all of the components of PITI and monthly HOA dues (if applicable) should be added together.
3. How Long Will a Lender Honor a Rate Quote?
When shopping around for quotes on different mortgage products, it is quite common for home buyers to make rushed decisions based on the lower of one or two choices. The reason behind it is that good mortgage rate quotes do not always make it to the final loan agreement. The mortgage rate market is as unpredictable as one could imagine, and a quote given on a Monday may not be the same by Tuesday.
In fact, lenders are in no way required to hold a quoted mortgage rate for a borrower unless they specifically agree to do so. Some lenders offer this information freely, of course, in order to keep a borrower’s business, but many neglect to share this information in hopes that they still manage to keep the business, but at a rate more beneficial to them. Home buyers must know when it is beneficial to get a rate lock on a mortgage quote, in order to preserve a decent interest rate while considering the loan agreement.
Without a rate lock, home buyers are typically putting themselves at the will of the market, or sometimes even the lender. A quoted mortgage interest rate is, after all, just a quote, and unless locked in, can be changed at the drop of a hat without any warning. The amount of time that a lender will honor a locked-in rate varies by the lender.
The average rate-lock period is about 30 days. Most of the time, a lock can be anywhere between 15 days (or rounded down to two weeks in some cases) and 60 days. However, the amount of time granted in a rate lock must be disclosed to the borrower as part of the rate lock agreement.
4. What is a Mortgage Refinance?
Homeowners, particularly first-time homeowners, are not always happy with the terms of their mortgage. In some cases, the home loan has become less affordable for some reason, and they simply want to relieve some of the financial burden that comes with a monthly mortgage payment. Sometimes, homeowners just want to explore different mortgage options or maybe get some cash out of their home equity without actually having to get a second mortgage.
Whatever the case may be, the common answer to all of those scenarios would be to refinance. Now, the fact that mortgages can be refinanced is no secret. Some would even venture to say it is as popular as actually getting a mortgage.
Still, many home buyers and homeowners are not exactly clear on what a mortgage refinance really entails, or what the refinance process looks like. For those who don’t know, a mortgage refinance is when a homeowner replaces their existing mortgage loan with an entirely new home loan, typically for the benefit of better loan terms or a lower interest rate. When a mortgage is refinanced, the remaining balance on the original mortgage is paid in full, and the new loan replaces the previous one.
There are many reasons why a homeowner would refinance their mortgage. As we’ve mentioned before, the most common reason is to get a better interest rate, and hopefully reduce the monthly mortgage payments. Still, depending on the purpose for refinancing the same result can be accomplished in other ways, and there are some other benefits that homeowners look forward to with a refinance as well.
A refinance can also be used to extend a loan term (lowering the monthly payments) or shorten it (to pay the loan off faster), switch from an adjustable rate mortgage to a fixed rate mortgage or vice-versa, tap into home equity, consolidate debt between a primary and second mortgage, and sometimes even to eliminate a balloon payment. Refinancing can help a homeowner save some serious money each month, or pay off their home loan sooner. However, determining whether refinancing is a good idea completely depends on the reason behind it, and what home loans the homeowner is eligible for.
Remember, a refinance is applying for a whole new loan. That means essentially going through the mortgage transaction process a second time. Homeowners will need to be ready to have their financial situation and credit history scrutinized, provide all of the necessary documentation for getting approved for a loan, and unfortunately, will have to deal with all the closing costs of the new loan. Luckily, a traditional down payment isn’t quite necessary, but that still leaves a few other up-front associated costs to contend with.
Refinancing a mortgage takes careful consideration, and works best when the market rates are lower than they were at the time of getting the original mortgage, or when the borrower’s financial situation has greatly improved, making them less of a risk. Even then, a quick-thinking homeowner facing financial hardship may be able to utilize a refinance to avoid foreclosure. Refinancing is an extremely useful mortgage solution for those in need of change regarding their home loan.
5. What Credit Score do I Need to get a Mortgage?
There is truly no specific answer here. The credit score required to be approved for a home loan depends on the lender’s specific qualification requirements as well as the mortgage program being applied for. Some loans will require a borrower to have exceptional credit to even be considered, while some home buyers with bad credit can still buy a home through one of a few programs that are more lenient when it comes to credit scores.
When it comes to conventional mortgages, lenders typically require borrowers to have a credit score of no less than 620. That does not mean that there aren’t lenders with more flexible requirements, however. In some cases, simply making a larger down payment can help lenders to overlook a lower credit score.
Many mortgage programs follow the conventional underwriting standards, with a few exceptions. The wildly popular FHA loan program accepts borrowers with credit as low as 500, providing they can make a down payment of at least 10%, but is even more popular with borrowers who have credit scores of at least 580, as they are only required to put 3.5% down. Better still, home buyers eligible for loan offerings from the USDA technically don’t have a minimum credit score requirement to meet, though eligibility is limited to borrowers of a very specific financial background.
Though not recommended, there are even lenders willing to make subprime mortgages for home buyers with bad credit. These subprime loans have little to no eligibility requirements and are specifically designed for borrowers who have been turned away everywhere else. The catch is that they typically come with incredibly high interest rates and fees, and sometimes less than ideal loan terms.
Home buyers should always keep their credit in mind when looking to get a mortgage, as it plays a vital role in both the qualification process and the interest rate that will be charged on a home loan. The best thing to keep in mind is that a score of under 500 may not be the best thing to work with, and the higher the score, the better chance of getting a solid home loan with an awesome rate.
6. What is an FHA Mortgage?
FHA loans are becoming more and more popular among home buyers each and every day. Surprisingly, there are still some borrowers who have no clue what an FHA loan is. For those who don’t know, FHA loans are government-backed mortgages insured by the Federal Housing Administration, a division of the United States Department of Housing and Urban Development.
The FHA mortgage program is the government’s way to promote homeownership for home buyers who may not qualify for conventional mortgages. The FHA insures mortgage loans in order to reduce the risk taken on by a lender, allowing them to have more flexible eligibility requirements for borrowers. Borrowers with credit scores as low as 500 are still eligible for the FHA loan program, and that isn’t the only benefit of FHA home financing.
In fact, FHA loans are largely sought after for their amazing low down payment requirements as well. While a conventional loan requires a down payment of at least 20%, a home buyer can get an FHA mortgage with as little as 3.5% down. Unlike most other mortgage products, they are made available to borrowers who have recently filed for bankruptcy, and FHA loans are assumable mortgages on top of everything else!
As if it couldn’t get any better, there are a bunch of different FHA loan types to choose from, depending on the situation. While the standard FHA 203(b) loan is the most widely used of all FHA mortgage products, there are FHA 203(k) loans for purchase and repair, FHA 245 and FHA 245(A) loans for borrowers who want to minimize their initial monthly payments, and even FHA 203(N) loans specifically designed for condo purchases.
There are even some awesome refinancing options when it comes to FHA mortgages. The FHA streamline refinance program uses the original FHA loan paperwork for a fast and easy refinance opportunity. There is even an FHA cash-out option for homeowners looking to tap into their home equity.
Probably one of the only drawbacks to FHA financing is the mandatory mortgage insurance that FHA borrowers are expected to pay. FHA’s mortgage insurance premiums are imposed as a one-time upfront fee, along with an annual fee divided into the monthly mortgage payments. Mortgage insurance is required as a means of securing the loan further, should the borrower default on the mortgage at any point during the loan term.
7. When is the First Mortgage Payment Due on a Home Loan?
Believe it or not, with everything else going on during and directly after a mortgage transaction, one of the easiest things for a home buyer to miss is the due date for their first mortgage payment. When finalizing the loan agreement, there is typically a date given, or at least the month of the first required payment, but again, it can be easily overlooked. Luckily, there is a bit of a trend when it comes to how soon borrowers will need to fork out their very first mortgage payment.
For home buyers who close a mortgage transaction at the beginning of a month, a payment typically does not have to be made for 60 days following the closing date. In contrast, home buyers who close later in the month generally have a little over 30 days before their first payment is due. Beyond the date that the loan was closed, sometimes the due date for the first payment is affected by other factors like whether or not the borrower purchased prepaid interest.
8. Do I Have to Get Pre-Approved or Pre-Qualified?
In short, the answer is: not really. However, some real estate agents will require home buyers to get a pre-qualification before they can make an offer on a home. Additionally, having either of them is abundantly better than not having any of them.
A pre-qualification basically involves a quick glimpse at a borrower's current financial situation. Pre-qualification can be done online or over the phone, and is minimally invasive. After looking at a borrower's income, assets, and debts, a lender can estimate how much money a home buyer will be able to borrow.
Pre-qualification is only really important for the early stages of the home buying process. It helps both the home buyers and their realtors better understand the price range of home that a borrower can afford. As such, it’s only really considered necessary by realtors who want to be sure that any offers made on a property are made seriously and in earnest.
Pre-approval is much more of a serious move. Mortgage pre-approval involves a much deeper probe of a borrower's credit history and financial situation, similar to the scrutinization that is done during the actual mortgage transaction. Home buyers even have to provide all of the required paperwork.
Getting pre-approved means having a solid figure of just how much home a borrower can afford, and is a huge help when it comes to speeding up the mortgage process. One drawback, however, is that it involves a “hard pull” of the home buyer’s credit history, which is known to negatively impact credit scores, if only by a little. Getting pre-approved can be very beneficial to the home buying process, but it isn’t mandatory.
9. What Factors Play a Role in Being Denied for a Mortgage Loan?
Getting a home loan can be a truly nail-biting experience, considering that borrowers must wait to be told whether they will be approved and become homeowners, or be denied and have to figure out their next move. Getting denied for a mortgage can be pretty bad for potential homeowner’s morale. What’s worse is that there are literally dozens of reasons for a lender to deny a potential borrower an approval for a home loan.
Of the many reasons, there are a few factors that seem to cause a majority of the mortgage application denials in the country. At the forefront is an inadequate or damaged credit history. A borrower’s ability to repay a home loan is at the tip-top of things that are most important to lenders when deciding loan eligibility.
Limited income and insufficient job history are pretty high up on the list of denial factors for the very same reason. In some cases, the home buyer’s lack of liquid assets (cash reserves, down payment, etc.) is another thing that will turn lenders away. Sometimes it has nothing to do with the borrower and everything to do with the property itself.
Some more reasons why a borrower might be denied for a mortgage include (but are not limited to):
1. Too large of a loan
2. Income too low
3. Borrower has no job
4. Rental income used to qualify
5. Too many debt obligations
6. LTV too high
7. Current mortgage underwater
8. Not enough assets
9. Unable to verify assets
10. Inability to document income
11. Job history too limited
12. Changed jobs recently
13. Self-employed for less than 2 years
14. Use of business funds to qualify
15. Limited credit history
16. Past delinquencies
17. Past foreclosure, short sale, or bankruptcy
18. DTI ratio exceeded
19. Credit errors
20. Unpaid tax liens
21. Unpaid alimony or child support
22. Divorce issues
23. Fraud
24. Attempting to buy multiple properties
25. Property doesn’t appraise at value
26. Defects with property
27. Home business on property
28. Non-permitted work
29. Homeowners association issues
30. Borrower owns too many properties
31. Co-signer for other loans
32. Property not really owner-occupied
33. Layered risk (lots of questionable things added up)
34. Incomplete application
35. Inability to verify key information
10. What Documentation Will be Required?
One of the most stressful aspects of applying for a home loan is having to gather all of the necessary documentation. Home buyers would do well to organize a binder with every single document that they will need long before meeting with a lender. Not every home loan requires the exact same documentation, but a good majority of lenders will need to see some standard things to get a better idea of a borrower’s financial situation.
Common documents requested in a mortgage transaction include forms of ID. Borrowers will need at least two, preferably a photo ID and Social Security card. They will also need something that shows their current address.
Tax Returns are also important to bring to a mortgage closing. Borrowers should bring the last two years’ tax returns, along with all relevant W2s and/or 1099s. These will help the lender get the most accurate picture of the borrower’s financial situation. For the self-employed, a profit and loss statement will be requested showing at least two years worth of data.
Pay stubs sometimes help establish a borrower’s current pay rate, which may be different from the rate that tax documents show. This commonly happens after a pay increase. Lenders want to check income from both directions. Pay stubs also give them the information they need to verify employment later. Borrowers on Social Security or Disability should bring that information in as well.
Bank statements are almost always at the top of a lender’s requested documentation. Anywhere a borrower may have money stashed, lenders are going to want to see a statement about it. Putting a fine point on the “any money, anywhere” statement above, bring in any investment statements as well. That includes retirement accounts, like a 401(k) or IRA. These investment accounts can be used in place of reserves, if the lender requires them. Also, in the case of a vested 401(k), funds from that account can actually be used as a down payment.
Divorcees must bring a valid Divorce Decree. This is just for the bank to verify that the financial responsibilities claimed from that marriage are correct (including child support and alimony payments), because they have to document everything.
If applying for a VA loan, a certificate of eligibility (COE) is required as proof that a borrower did, in fact, serve the country. It’ll also show what the amount of benefit through the VA loan program will be.
Borrowers using gift money towards a down payment will need to bring a valid gift letter. Gift letters must be written with the correct legal terminology and be signed by both the giftor and the giftee and notarized. Gift letters must adhere to specific rules and display that any money gifted is not expected to be repaid.
It may seem obvious, but it is imperative that the home buyers or at least the realtors bring a copy of the sales contract along. If applicable, any bankruptcy documentation must also be brought to the lender’s attention.
11. What does a Mortgage Broker Do?
Shopping around for a mortgage can be difficult, especially for those who aren’t particularly knowledgeable about home loans or home finance. The actual act of searching for and contacting lenders can be a tedious process, and most home buyers don’t look forward to it. Those that do put in the work typically do a minimal sweep of what’s available, and may miss better opportunities.
That’s where mortgage brokers come in. A mortgage broker is a kind of intermediary whose job is to connect home buyers with banks, mortgage lenders, or investors for their home purchase. With a mortgage broker, all a home buyer has to do is provide their broker with accurate information on their credit history and financial situation, and the broker does all of the shopping around and home loan comparison on the borrower’s behalf.
Mortgage brokers handle all of the footwork when it comes to finding a home loan, and typically have a portfolio of lending institutions and local banks to pull quotes from. Borrowers can specify what they want out of a mortgage loan and have their mortgage broker bring back the results that best match their criteria. Mortgage brokers are particularly useful for borrowers with less than excellent credit or those who may find it hard to get approved for any other reasons.
The services of a mortgage broker are not mandatory, but for those who do not have the time or patience to shop around for the best rates and loan terms, their service could mean saving thousands on a mortgage. Home buyers can expect to pay anywhere between 1% and 2% of the principal amount on a home loan to a mortgage broker for their services.
12. How Much of a Down Payment Do I Need to Make?
Down payments are one of the most stress-inducing aspects of getting a mortgage. In most mortgage transactions, lenders expect borrowers to pay a portion of the home’s cost upfront and out of pocket, as a down payment. Down payments help to create a less risky loan-to-value ratio for lenders, and shows them that the borrower is serious enough to be willing to invest some of their own money.
Just how much of a down payment is required truly depends on the lender and the loan program involved. For example, it is common industry practice for borrowers to make a down payment of at least 20% for a conventional mortgage loan. However, lenders may be more flexible or more strict depending on their personal underwriting methods.
Some programs are much more lax with their down payment requirements, like with FHA-insured mortgages. FHA loans are hugely successful, partly because of their ridiculously low down payment requirement of only 3.5%. They only go as far as requiring 10%, and only in cases where the borrower has a credit score on the extra-low side, between 500 and 579.
In an attempt to compete with the FHA, Fannie Mae’s Conventional 97 loan options carry even lower down payment requirements. The conventional “97% LTV options” from Fannie Mae allow home buyers to get a mortgage with only 3% down. The difference of .5% may not seem like much at first, but it really adds up in the long run.
On the other end of the spectrum, some lenders require much larger down payments. Home buyers looking to purchase a second home or even an investment property may be asked to provide a down payment larger than 20%. Some lenders will only approve home loans for investment properties if a down payment of at least 30% is made.
And then there are some mortgage programs like VA loans and USDA loans that can boast a zero down payment home loan. Really, it all depends on what the loan program and the lender require. It is up to the borrower to know how much of a down payment they can comfortably afford, and which program or lender can facilitate that.