Understanding Conventional Loan Down-Payment Options
A down payment is the portion of a property's purchase price that a homebuyer pays from eligible funds rather than financing through the mortgage. Understanding your options can help you make a more informed decision.
Down-Payment Basics
How a Down Payment Works
The purchase price of a home is generally funded through a combination of the borrower's down payment and mortgage financing. The down payment is the portion the borrower contributes from eligible funds at the time of purchase.
Conventional mortgage programs can offer different down-payment options depending on the borrower, property, occupancy, loan program, and lender requirements. The appropriate down payment is not necessarily the same for every borrower.
The amount a borrower contributes can affect:
- The amount financed
- Loan-to-value ratio
- Monthly mortgage payment
- Mortgage insurance requirements
- Cash needed at closing
- Overall financing structure
Common Question
Is 20% Down Required?
A 20% down payment is NOT universally required for conventional mortgage financing.
Certain conventional programs may permit qualified borrowers to purchase eligible properties with less than 20% down. The actual minimum down payment depends on factors such as:
- Loan program
- Property type
- Occupancy
- Number of units
- Borrower qualifications
- Loan amount
- Lender requirements
Weighing Your Options
Smaller vs. Larger Down Payment
Neither a smaller nor a larger down payment is automatically better. Each has potential considerations that depend on the borrower's overall financial situation.
Option A
Smaller Down Payment
A smaller down payment may allow an eligible borrower to purchase a home while retaining more of their available funds. However, depending on the financing structure, a smaller down payment may result in:
- A larger mortgage balance
- Higher monthly principal-and-interest payments
- Mortgage insurance requirements
- Different pricing or underwriting considerations
Option B
Larger Down Payment
A larger down payment generally reduces the amount that must be financed. Potential considerations may include:
- Lower mortgage balance
- Lower loan-to-value ratio
- Potentially lower monthly principal-and-interest payment
- Reduced or eliminated private mortgage insurance in certain situations
- Less cash remaining after closing
Borrowers should consider their overall financial situation rather than simply putting the maximum possible amount down.
Important Distinction
Down Payment vs. Closing Costs
The down payment and closing costs are separate parts of a real estate transaction. Borrowers should plan for both when preparing for a home purchase.
Closing costs may include items such as:
- Lender-related charges
- Appraisal
- Title and settlement expenses
- Government recording charges
- Prepaid property taxes
- Homeowners insurance
- Initial escrow funding when applicable
- Other transaction expenses
Actual costs vary by transaction.
Funding Your Down Payment
Sources of Down-Payment Funds
Depending on the mortgage program and lender requirements, eligible funds may potentially come from sources such as:
- Borrower checking or savings accounts
- Eligible investment or asset accounts
- Proceeds from the sale of another property or eligible asset
- Eligible gift funds
- Certain approved assistance programs
- Other acceptable documented sources
Documentation and eligibility requirements apply. Not every source is acceptable for every mortgage program.
Gift Funds
Using Gift Funds for a Down Payment
Certain conventional mortgage programs may permit eligible gift funds from acceptable sources. Gift-fund requirements can include documentation regarding:
- The donor
- Transfer of funds
- Relationship to the borrower
- Confirmation that the funds meet applicable program requirements
Requirements vary by lender and loan program.
Down-Payment Assistance
Assistance Programs
Some eligible homebuyers may have access to down-payment or closing-cost assistance through state agencies, local programs, housing organizations, participating lenders, or other approved sources.
Program availability may depend on:
- Income
- Property location
- Purchase price
- First-time homebuyer status
- Occupancy
- Funding availability
- Other program requirements
Program availability, eligibility, and funding are not guaranteed and are subject to change.
Mortgage Insurance
Down Payment and Private Mortgage Insurance
With certain conventional mortgages, private mortgage insurance (PMI) may be required when the borrower makes a smaller down payment or when the loan-to-value ratio exceeds applicable program thresholds.
PMI requirements and cancellation options depend on the mortgage structure, applicable law, investor requirements, and lender guidelines.
How Much Should You Put Down?
There Is No Single Right Answer
"There is no single down-payment amount that is right for every homebuyer."
Borrowers may want to consider:
- Available savings
- Emergency reserves
- Monthly housing budget
- Closing costs
- Moving expenses
- Planned repairs or improvements
- Other financial obligations
- Mortgage insurance
- Long-term financial goals
Prosper Path Group can help borrowers explore available mortgage options based on their individual circumstances.
Ready to Begin?
Explore Your Down-Payment and Mortgage Options
Connect with the Prosper Path Group team to discuss your down-payment options and explore the mortgage financing that may be available for your situation.
Down-payment requirements, acceptable sources of funds, mortgage insurance requirements, loan terms, rates, assistance-program availability, property eligibility, and borrower eligibility vary by lender and loan program and are subject to change. Not all applicants or properties will qualify. This information is provided for general educational purposes and is not a commitment to lend.
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