Down Payment

Lenders like buyers to put 20% down payment because it is considered less risk to them. Depending on a home buyer's credit score, location of property, income and assets, some lenders may require 20% down payment. If the home buyer qualifies for an FHA loan, which is a government program to help buyers with lower income and lower credit scores, as well as insuring the lender on the loan, down payments can be as low as 3-3.5%.

There are pros and cons to both putting more for down payment or less for down payment as listed below. Many investors prefer to put as little down as possible as it provides a higher return on investment (ROI) and allows them to have more cash to use for remodelling or other investments. Although down payments of less than 20% require private mortgage insurance (PMI insures the lender if buyer defaults and home gets foreclosed), there are a few ways to remove PMI.

One of the best methods to remove PMI after 6 months - 12 months with minimal costs is to purchase a property at least 20% below market value. After a year, have the property appraised (home owner pays for the appraisal), in which the home owner should have at least 20% of equity or at most, 80% loan to value (LTV), then provide the appraisal report to the lender and request to have the PMI removed. Always check with the lender on this process of removing PMI before obtaining a mortgage from them to make sure they allow PMI to be removed once the home owner has at least 20% equity.


    20% Down Payment

      PROS:
      • Lower monthly payments (by a few hundred dollars for loans under $400,000)
      • No PMI - typically $100-$200 for mortgages $200,000-400,000


      CONS:
      • Higher down payment which results in less cash on hand
      • Larger amount of cash / equity at risk
      • Lower ROI upon sale (i.e. $10,000 profit on $40,000 down payment = 25% ROI)



    5%, 10%, 15% Down Payment

      PROS:
      • Lower down payment, which results in higher cash on hand
      • Less amount of cash / equity at risk
      • Higher ROI upon sale (i.e. $10,000 profit on $10,000 down payment = 100% ROI)


      CONS:
      • Lenders will require PMI (typically $100-$200 for mortgages $200,000-400,000)
      • Higher monthly payments (by a few hundred dollars for loans under $400,000)

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