What Happens If You Can't Put 20% Down on a House?

What Is a Mortgage Down Payment?#

When someone purchases a new home, they are typically required to pay a portion of the price at the time they purchase the property, and then pay the balance of the loan over a pre-determined number of years. This initial investment is called a down payment. Every mortgage loan has a different set of criteria for the down payment amount, and the amount can vary significantly, so it is extremely important to get the right mortgage product for your particular financial situation.

A growing number of lenders are writing mortgage loans for far less than the historical 20% requirement, and even less than 10%. However, a lower down payment could affect whether you will be required to pay for private mortgage insurance, what type of loan is the right one for you, and your interest rate.

Why a Smaller Down Payment Triggers PMI#

A homebuyer who makes a down payment of less than 20 percent of the cost of the home is required to obtain private mortgage insurance. This insurance protects the lender if the borrower defaults on mortgage payments, not the homeowner.

How Much PMI Typically Costs#

The cost of private mortgage insurance varies by lender. The table below shows the general range.

An Example of How PMI Is Paid

Say you buy a house for $160,000 and make a 15% down payment. The amount you would need to borrow from the lender would be $136,000. If your annual premium for PMI is 0.5%, the insurer would multiply the loan amount by 0.005. Your annual PMI premium would be $680, which is paid monthly at $56.67.

When PMI Can Be Removed#

Private mortgage insurance usually can be eliminated once the principal balance of the mortgage reaches 80 percent of the sale price or appraised value, known as the loan-to-value ratio. Once a mortgage reaches this 80 percent loan-to-value ratio, ask your lender to discontinue the private mortgage insurance premiums.

PMI and Your Monthly Payment#

A typical monthly mortgage payment includes principal, interest, real estate taxes, and property insurance, known together as PITI, and often also private mortgage insurance. Borrowing more than 80 percent of a home’s value may require PMI, which increases the monthly payment on the loan.

Types of Loans#

When deciding which type of loan is best for you, you have the option of a fixed-rate or an adjustable-rate mortgage.

• Fixed-rate mortgage: this home loan has a predetermined fixed interest rate, and it does not change for the entire term of the loan.
• Adjustable-rate mortgage (ARM): this mortgage or equity loan has an interest rate and monthly payments that may change during the term of the loan, based on a fluctuating index. Most ARMs have a rate cap so that the interest rate can only change up to a certain point during the initial adjustment period and the entire life of the loan.

Interest Rates#

Your interest rate is the cost you pay for the ability to use your loan. It is paid over a set period of time and can vary depending on how much you put down on your home. You will typically get a lower interest rate from your lender if you put more down on your home in the beginning.

Getting Help From a HUD-Approved Housing Counselor#

We encourage homebuyers who cannot afford a 20 percent down payment to contact a HUD-approved housing counseling agency. Such an agency can assess the homebuyer’s situation and determine whether they qualify for special programs that help toward homeownership. Cambridge Credit Counseling is itself approved by the U.S. Department of Housing and Urban Development to provide housing counseling services throughout the country, including first-time homebuyer courses.

What Cambridge Credit Counseling Offers#

Cambridge Credit Counseling is a 501(c)(3) nonprofit agency that offers credit counseling, housing counseling, reverse mortgage counseling, bankruptcy counseling, and other financial literacy services, including first-time homebuyer education courses.

What to Do Next#

If a 20 percent down payment is out of reach, consider reaching out to a HUD-approved housing counseling agency, such as Cambridge Credit Counseling, to review your situation and learn whether any special homeownership programs might apply to you.