Conventional Home Loan Down Payment Requirements (Quick Checklist)

By James Young on June 11, 2014
Conventional Home Loan Down Payment Requirements (Quick Checklist)

If you’re ready to look for that next new home, it’s a good idea to get your financial house in order first. Sitting down with a lender not only helps you understand the qualifications necessary for financing, but also provides you with the opportunity to get questions answered about the entire process, such as conventional home loan down payment requirements.

Often, a down payment is the biggest hurdle standing between renting and home ownership. If you will be seeking out a conventional home loan, there are a number of things to keep in mind as you consider pulling together funds for your down payment.

Size of the down payment

The down payment represents a percentage of your home’s selling price and is paid upfront as opposed to being financed. It is due when you close on your home mortgage loan.

From a lender’s perspective, a down payment shows a prospective home owner has some skin in the game. So from your lender’s standpoint, it is extremely important. It shows you are able to make a personal investment in your home.

The size of your down payment impacts other facets of your loan. For example:

  • Whether you will need to pay private mortgage insurance (PMI).
  • The type of loan available to you, including fixed rate or adjustable.
  • Your interest rate on the loan.

The amount of down payment required depends on a number of factors, but is primarily determined by the purchase price of your new home and the loan program you will be using. Requirements for down payments can vary widely, typically anywhere from 5 percent to 20 percent. Your lender can discuss the different requirements with you as you compare loan programs.

There are a number of things to take into account when deciding how large of a down payment you are able to put toward your home purchase. One important consideration is your loan-to-value ratio, which decreases as your down payment increases.

This figure represents how much you owe on your house after your down payment is applied. In other words, it’s a percentage that reflects the ratio between your home’s unpaid principal and the appraised value. A lower ratio is favored. The higher your down payment, the lower your ratio will be.

Other sources of down payment funds

If you don’t currently have enough cash in your bank account to make the amount of down payment necessary for your loan program, you have probably already begun considering other sources, such as borrowing from family or close friends.

Your real estate agent can also be an invaluable resource for helping you pull together the down payment. He or she may know about sate and local housing incentives that are available to you, as well as special loan programs or grants.

Before counting on these sources, however, it’s wise to check with your bank, credit union or mortgage broker to be sure the source of your down payment is still in compliance with loan rules.

One more word of caution: before pulling money out of a retirement account to cover your down payment, talk to your tax advisor. Be aware of any and all penalties that will come your way should you go this route.

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About James Young

My name is James Young- I love red wine, sailing, and playing guitar. I believe that everyday is truly a gift. I'm blessed to live five minutes from the sand in the beautiful city of Long Beach, CA. When I'm not assisting homeowners, you'll find me belting melodies with friends around a campfire, wandering the halls of an art exhibit, or watching ESPN re-runs until the sun comes up. So what am I doing here, you might ask? In a couple of sentences- I'm passionate about empowering first-time and experienced home buyers to make their dreams a reality. Whether it's saving thousands on your home loan, buying your first home, or acquiring your first investment property, I'm always here to help. Don't hesitate to ask questions, and please remember to "share the love"! :) #loveloans #loverealestate #lovelife!