What to Know About Down Payments
December 23, 2022
While down payments are one of the biggest obstacles for many in the mortgage process, it helps to understand the ins and outs of why they play such a big role.
Why Do Down Payments Matter?
Down payments go a long way in giving a lender peace of mind when loaning you a sizeable chunk of money for a home purchase. By putting money down on a home, you are assuring a lender that you intend to follow through on the loan to the best of your ability.
Additionally, the amount of money you are able to put down does not affect the interest rate you get from a lender, but it does play a part in how much you pay in interest over the life of the loan. That essentially means that the less you borrow, the less interest you’re paying on it. If your home costs $300,000, and you pay $40,000 down, you would be paying interest on $260,000. Whereas if you put only $20,000 down, you would be paying the same interest rate on a larger amount, making it amount to larger interest payments in total.
Down Payment Requirements
When shopping for a mortgage, the down payment requirements play a big role in your decision, so it helps to know what the conditions are for the different types of home loans.
For most conventional loans, borrowers must pay 20% of the purchase price. Since many first-time homebuyers find it difficult to afford such a large, upfront payment, conventional lenders tack on a monthly Private Mortgage Premium until the buyer is able to pay off 20% of the purchase price.
Since FHA loans are backed by the government, they have a lower down payment requirement of 3.5% of the purchase price. It is important to keep in mind that though the FHA has set this low limit, FHA-approved lenders can place “overlays” and place more stipulations.
Down Payment Assistance
While all this may seem daunting, keep in mind that there is a way to make saving easier. As a borrower, you should know that down payment assistance is available in three forms:
Down Payment Grants: State and municipal agencies and housing authorities have many programs for first-time and repeat homebuyers that can be put towards paying mortgage expenses like down payments and closing costs, without any repayment stipulations.
Second Mortgages: Some assistance programs are offered as a second mortgage with low- or zero-interest rates that need to be paid when the home is paid off, sold, or refinanced. Some loans are completely forgiven after a certain period of time.
MCC: A Mortgage Credit Certificate (MCC) is a tax credit issued by state or local government that allows a taxpayer to claim some portion of the mortgage interest paid. While this is not a tax deduction, it does provide a dollar-for-dollar tax credit to homebuyers for the interest paid during a given tax year.
Keep in mind that all these assistance programs come with their own eligibility criteria, and may be awarded to applicants based on income level, credit scores, occupation, etc.
------------------------------
RELATED VIDEOS:
You're Almost There When You Get Your Loan Approval
Learn About the Mortgage Insurance Premium (MIP)
Pre-approval Starts the Mortgage Process
FHA Loan Articles
August 19, 2026Homebuyers who have enough cash for a down payment still need to consider their full financial picture before choosing between a conventional mortgage and an FHA loan. Having cash on hand changes the math for both options, but savings alone won't make a conventional loan the automatic winner. Credit scores, current debt, and the type of property you want to buy all determine which loan will cost less over time.
August 11, 2026Homeowners with FHA adjustable-rate loans need to track their loans more closely. That is because FHA ARM loans start with introductory interest rates that eventually expire and are subject to change afterwards based on market rates. When interest rates rise, monthly housing payments climb on ARM loans, pushing many homeowners to consider refinancing into a fixed-rate mortgage.
August 10, 2026If you want to buy a home with an FHA mortgage, you must set up an escrow account to cover property taxes, homeowner insurance, and upfront closing expenses. While the FHA loan program has rules for funding these accounts, buyers often do not realize those rules can include approved and unallowed sources for escrow funds. What do you need to know before you set up and fund your escrow account for an FHA mortgage?
August 3, 2026Buying a home in a high-cost area requires understanding how FHA loan limits shape your financing options. Does the house for sale have a price above the local FHA loan limit? You may need to explore your jumbo loan options. There are conventional jumbo loans and FHA versions. Which is right for you? Much depends on your financial needs, plans, and goals for the loan.
July 30, 2026There is a common misconception about FHA loans that only a first-time home buyer can use the program. This is not true; repeat buyers can qualify for an FHA loan, but why does this misconception exist? Partially because state and local programs have first-time buyer requirements for down payment and/or closing cost assistance programs. So while you do not need to be a first-time buyer to get an FHA loan, you may need to meet that definition to qualify for down payment help.
