Down Payment When Buying a Home - How Much Do I Need?

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Reader Question: "I'm planning to buy my first home later this year. I've heard a lot of conflicting information about the size of down payment I'll need when buying a house. As a first-time buyer, how much of a down payment will I need to get a mortgage loan in 2011?"

It has more to do with the type of loan you use, than the fact you're a first-time buyer. Most of the down-payment requirements imposed by lenders apply to all borrowers, regardless of whether you're buying your first house or your fourth. So let's talk about how much money you might have to put down to get a mortgage in 2011.

Down Payments for FHA Loans

If you use an FHA home loan to buy a house, your down payment could be as low as 3.5% of the purchase price. For example, on a $250,000 home, you would have to put $8,750 down. If you're not familiar with this loan program, you might want to read this article. In a nutshell, these are loans that are backed by the federal government (through the Federal Housing Administration). You apply for the loan through a regular lender, such as Wells Fargo or Bank of America. But the loan gets insured by the FHA.

Your credit score will affect how much of a down payment you need for an FHA loan. Under the current guidelines for 2011, borrowers with a credit score of 580 or above will qualify for the 3.5% down payment we talked about above. But those with a FICO score below 580 will have to make a larger down payment -- at least 10% of the purchase price.

Conventional Mortgage Loans

A conventional mortgage loan is one that's not backed by the government. This makes it distinct from FHA loans, VA loans, and other forms of government-insured mortgages. With a conventional home loan, your down payment will range from 5% - 20%, depending on several factors. Among other things, this will depend on where you live.

In some states, you can use an 80-15-5 piggyback strategy to limit your down payment to 5% of the purchase price. In other states (like California), very few mortgage lenders are offering piggyback loans like the 80-15-5. In this case, you'll be expected to have a down payment of 10% or more -- unless you use an FHA loan.

Mortgage Insurance and Low LTV Loans

If a single mortgage loan accounts for more than 80% of the purchase price, you'll have to pay mortgage insurance on top of the loan. This could add anywhere from $75 - $150 onto your monthly payments. To state it differently, private mortgage insurance (PMI) is usually required when your down payment is less than 20% of the home price.

The 80-15-5 strategy we discussed earlier is one example of a strategy for avoiding mortgage insurance. The bank loans you 80%, you get a second loan for 15%, and you pay the remaining 5% in the form of a down payment. Because neither of the two loans exceeds 80% of the purchase price, you could avoid paying PMI. But again, it depends on whether or not lenders in your area are still offering piggyback mortgages. Many lenders in 2011 have gotten away from these loans.

Don't Forget Your Other Expenses

So far, we've only talked about your down payment. But there are other expenses when buying a home. You'll have to pay a variety of fees related to the mortgage loan. These are referred to as your closing costs, and they can add up to several thousand dollars. Keep in mind that this is money you must pay upfront, during the closing process.

Additionally, some lenders will require you to have a certain amount of cash reserves in the bank -- beyond what's needed for down payment and closing costs. Basically, they want to see that you have enough to cover your first couple of mortgage payments.

Related article: How much money should I save to buy a house?

This article explains how much of a down payment you might have to make, when buying a home. If you'd like to learn more about this topic, try using the search tool at the top of this page. It will give you access to hundreds of home-buying articles. Good luck.