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Determining Your Mortgage Down Payment

When finalizing a mortgage loan, homebuyers typically have to pay a portion of the total cost of the property upfront. That’s known as the down payment. Last year, the average down payment on a home purchase was about $32,000, according to a report from RealtyTrac, a research provider

That may be an eye-popping and anxiety-inducing figure for many prospective homebuyers. But don’t fret, and don’t cancel your plans — certain types of government-backed mortgages let consumers pay less on down payments when they borrow from lenders like Fitzsimons Credit Union. Here’s a closer look at some of your options and how they can affect the size of the down payment. 


Conventional loans

Let’s start with conventional home loans, which are the most common type of mortgage. These typically require down payments of 5% to 20% of the purchase price. The lower your down payment, the higher your monthly mortgage bill will be.

What’s more, if you pay less than 20%, you may be charged for private mortgage insurance, or PMI. That’s because your lender is letting you borrow more money, meaning it will also lose more cash if you end up defaulting on your loan. So the insurance you’re paying cuts the lender’s risk, not yours.


Federal Housing Administration, or FHA loans

Loans backed by the Federal Housing Administration tend to have lower down payments. Borrowers may need as little as 3.5% down. These government-backed loans also typically come with more lenient requirements than conventional loans, making them ideal for people with lower credit scores or who need help coming up with down payment funds.

Anyone can apply for an FHA loan, regardless of income. However, you’ll be able to borrow up to only a certain amount, which will be based on where you live. Also, the program requires a form of mortgage insurance, including an upfront payment, which can be covered by the loan, and monthly premiums.


Other government loans

The Department of Veterans Affairs, or VA, offers another type of government-backed mortgage called a VA loan. These are available to qualified active-duty service members, veterans and surviving spouses, as well as reserve and National Guard members. One of the biggest advantages of VA loans is that they sometimes don’t require any down payment. However, you will be charged a funding fee of 2.15% to 3.3% of the loan amount, and it can be included in the mortgage. Unlike FHA loans, which have borrowing limits depending on the property’s location, VA loans are capped at $359,650 for all prospective homebuyers.

The United States Department of Agriculture, or USDA, offers home loans to low-income borrowers who live in rural areas. These products typically don’t require down payments.


The takeaway

Unless you qualify for a USDA or VA loan, chances are good that you’ll have to put down at least some money when sealing the deal on your mortgage. Therefore, it’s a good idea to ramp up your savings in the months leading up to your purchase and to pay down your debts to boost your credit score, which will help you lock in lower interest rates.

To free up additional money for the down payment, consider cutting back on nonessential expenses. Although that may not be much fun in the near future, it’ll pay off over the long haul. In the meantime, keep your mortgage options open, and know that the aforementioned government-backed loans can reduce the down payment you’ll need for your new home.

Tony Armstrong, NerdWallet

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