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How much of a down payment do I need?

How much down payment do I need to put down?
The answer to this question is: "It depends". These days however, you can start at zero and go to whatever money you can afford to put down.

Zero-down loans are relatively new but are gaining popularity as lending institutions become more comfortable with them. One of the reasons lending institutions are getting more comfortable is that most people do not default on their loans and lending institutions understand this. Nowadays, many advertised homes have no money or very little money down. These can prove to be an excellent way to go but you should carefully examine the details of these offers. In most cases, however, you will need to put some money down. The lender feels that the more money you put down for the home the more likely you are not to default on the loan because you have equity in the home.

It is recommended to put down about 20 % or more of the cost if you have that amount of money available. This is known as 80% Loan To Value ratio (LTV). If you put down less than this you will be required to pay Private Mortgage Insurance (PMI) which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. It's determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Remember that under the federal law the lender is required to cancel the PMI once the LTV ratio reaches 78% or, in other words, when your mortgage amortized to 78% of the original value of the house. The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78% mark.

Some lenders may require this 20 % to be put down in order to get a loan. You can be turned down for a loan if you are not able to come up with the 20 % the lender requires. In some areas of the country such as the New York Tri State area and the San Francisco Bay area, where homes for even the first time buyer are every expensive, 20% can be a large amount of money. Starter homes in these areas can cost $300,000 or more.

For Federal Housing Authority (FHA) loans, you may only need to put down as little as 3% of which 2% can be a gift from a friend, relative or Nonprofit organization. However, you will need to pay PMI on this loan.

A new development is that nontraditional lenders are jumping into the mortgage game. Many of these are investment companies such as Fidelity. They allow you to borrow on a margin, which basically means you are essentially using your brokerage account as collateral for whatever you are buying. Your brokerage account may be your retirement account or investment assets you don't wish to sell in order to come up with down payment cash. If you accounts are with other financial institutions, investigate if they offer this option.

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