Calculate Mortgage Down Payment

How much down payment is required?

As little as 2% from your own funds, but the more down payment, the less expensive and problematic the mortgage process will be.

Typically, first time buyers and low-to-moderate income renters face a variety of obstacles to home ownership. These include coming up with the cash for the down payment and closing costs or having the income required to qualify for the mortgage. In today's economic climate, saving 20% for what is considered the "ideal" down payment can be frustrating. The less down payment, the more your credit will be scrutinized and the more expensive the first years of the mortgage will be. With less than 20% down, you will be required to purchase Private Mortgage Insurance (PMI).

What is Private Mortgage Insurance (PMI) and who does it protect?

PMI is essentially an insurance program with the sole function of protecting the lender in case of borrower default.

Years ago, a down payment of at least 20% was needed to purchase a home. Today, lenders will approve a mortgage with a smaller down payment if the mortgage is covered by PMI. Mortgage lenders would like to see a down payment of at least 5% of the purchase price, plus the money required to cover the closing costs (maybe another 5%). The average PMI payment is about $45 per month. PMI payments stay in place until the borrower's equity reaches 20%, at which point some companies will remove it, if asked.

Lenders generally require PMI on low down payment loans because experience and studies show that borrowers with less than 20% invested in a house are more likely to default on their mortgage.

The mortgage insurer and the home buyer share a common interest in the Mortgage-financing transaction: the greatest risk of loss in the event of default. The borrower will lose the home and the equity invested in it, and the mortgage insurer will have to pay the lender's claim for loss on the defaulted loan. The insurer and the borrower are both concerned that the home is affordable not only at the time of purchase, but throughout the years of home ownership.

A PMI Example . . .

A first time buyer has a household income of $55,000, but only $6,250 to put down. If they were required to make a traditional 20% down payment, the $6,250 would equal 20% of a $31,250 house. Houses at $31,000 these days are tough to find! With PMI, you need just 5% down. Now, our buyer can afford to purchase a house for $125,000. That means they now can purchase four times the house, without waiting months, or even years, building up the extra savings for a 20% down payment needed to get into that house.

It gets even better. Normally buyers must make a down payment of at least 5% of the home's value to be considered for PMI. In today's mortgage market, however, 5% down could include a gift of 3%, so just 2% of the borrower's own funds would cover the down payment. In this case, the buyer's credit worthiness will carry additional weight.

Is PMI like Credit Life Insurance?

Credit Life Insurance protects the borrower, PMI protects the lender.

PMI is unique compared to other types of property or life insurance purchased by a homebuyer. It should not be confused with credit life insurance, a policy that repays an outstanding mortgage debt upon the death of the borrower who holds the insurance policy.

Can I use a gift as part of my down payment?

Gifts are allowable up to a specified limit. Usually gifts make up 2-3% of the down payment.

Gifts must be from a blood relative, and a dated, signed letter is required stating relationship to the borrower, and that the funds are a gift and not a loan. See your lender for the proper language. The gift giver will also need to show assets in place, covering the gift amount and proof of transfer of said funds.

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