A lender will usually not approve a mortgage loan for the full cost of purchasing a home. Instead, the buyer must come up with part of the purchase price some other way, e.g. by using savings or by taking out another loan that doesn’t use the home as collateral.
Generally speaking, the more money you have available for the down payment, the better conditions will you be able to negotiate for your mortgage loan. This is because the lender takes a smaller risk if there is plenty of room between the size of the mortgage loan and the market price of the real estate. The main idea with a mortgage loan (as opposed to unsecured loans) is that the real estate can be sold to repay the mortgage loan if the borrower fails to adhere to the repayment plan. If the loan-to-value ratio is high (e.g. a $95,000 mortgage loan on a property valued at $100,000) the risk is higher that the forced sale will fail to bring in enough money to fully compensate the lender. If on the other hand the loan-to-value ratio is low (e.g. a $75,000 mortgage loan on a property valued at $100,000) the risk of the lender not being fully compensated is smaller. Even if the property would sell a bit below its valuation, there would still be enough money to compensate the lender in full.
Down-payment and mortgage loan insurance
How much money you have available for a down-payment will typically impact your need for a mortgage loan insurance. Mortgage loan insurance is provided by a third-party and protects the lender from losing money if you default on our loan. In some situations, obtaining mortgage loan insurance can be necessary for the borrower’s loan application to be approved. In other situations, the borrower can elect to get mortgage loan insurance as a way to negotiate down the interest rate for the loan.
In the United States, most lenders will not require mortgage loan insurance if you ask to borrow 80% or less of the property value, i.e. if you down-payment is at least 20%.
These numbers are not set in stone – it is up to the lender to decide based on various factors. Someone with great creditworthiness purchasing a property in an up-and-coming neighborhood can be allowed to borrow more than 80% without mortgage loan insurance, while someone with poor creditworthiness purchasing a property in a downhill market can be required to obtain mortgage loan insurance even for a mortgage loan that is smaller than 80% of property value.
In the wake of the U.S. real estate bubble
During the U.S. real estate boom of 2000 – 2007 it was comparatively easy to purchase real estate with no down-payment or just a very small down-payment. Lenders were offering 100% financing, or allowed the buyer to take out an 80% first mortgage and a 20% second mortgage. Seller-financed down payment assistance was also common.
Today, in the wake of the subprime loan crisis, purchasing real estate without any down-payment has become much more unusual in the U.S. Still, there are several federal and state programs available that will aid prospective home buyers who have a hard time finding the money for a big down-payment. Two of the most well-known ones are run by the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA), respectively.
Low down-payment thanks to the Federal Housing Administration (FHA)
If you are approved for a mortgage loan where the mortgage insurance is provided by the Federal Housing Administration (FHA), you can make a down-payment of just 3.5%. The FHA is a part of the U.S. Department of Housing and Urban Development (HUD) and aims to help individuals and families in the United States to become homeowners. You can find more information on our page “FHA insured mortgage loan”.
No down-payment thanks to the Department of Veteran Affairs
The U.S. Department of Veteran Affairs (VA) runs a program that makes it possible for qualified veterans to purchase a home without any down-payment. Through this program, VA can provide mortgage insurance for a mortgage loan covering 103.5% of the property’s purchase price.
The program is open for U.S. military veterans, and also for certain Reservists and National Guard personnel. The spouse of a qualified person can also be eligible. You can find out more on our page “VA loan (USA)”.