One of the biggest parts of purchasing a home is the financing. Shopping around for the lowest interest rates will allow you to spend more on a house and keep your monthly payments lower. Experts recommend to make sure your credit is good and you have saved a good amount for a down payment.

Traditionally it is recommended that a potential homeowner should be able to put 20% of the purchase price down at closing. Nowadays this is not necessarily the case. Depending on where you live and what kind of mortgage you are obtaining you might not have to put 20% down.

For a conventional mortgage, you need to put at least 20% down to avoid private mortgage insurance (PMI). Private mortgage insurance is an extra charge that is added to your monthly mortgage to protect the lender in case you default on your loan. The Consumer Financial Protection Bureau (CFPB) explains that PMI is put in place to protect the lender only, a buyer who puts less than 20% down is more of a liability for a lender.

PMI does not go toward paying off the mortgage so a buyer will be paying more each month and not getting any closer to the end goal. This is one of the main factors of why a down payment can affect your mortgage just as much as your credit score.

“In essence, a bigger down payment may allow you to buy a higher-priced home,” Movement Mortgage loan officer Heidi Gage said.

Lenders have a system in place to decide who gets a mortgage and who does not. According to Heidi Gage, there are the “four Cs” lenders should consider when looking at prospective mortgage applicants, 1) credit history and score; 2) collateral (type of property being secured); 3) cash (your down payment) and 4) capacity (how much debt you have versus income every month).

″Underwriters review the loan based on the above criteria, as well as layered risk factors,” explains Gage.

Basically, if your debts are high and your income is stretched too thin you would need a big down payment in order to be approved for a mortgage. Gage says that someone with a “risky debt-to-income ratio” can be approved with a lot of cash for a down payment and excellent credit history.

Have no fear if you cannot put down 20%, there are some flexible mortgage options that allow as little as a 3% down payment. Examples of these options are VA loans, USDA loans, FHA loans, Fannie Mae loans and Freddie Mac loans. First time home buyers also have special programs that allow lower down payments. According to the National Association of Realtors (NAR) the average first-time homebuyer in 2019 put down as little as 6% down on the purchase of their home.

“The closer a borrower comes to 20% down, the lower their monthly payments will be,” says Gage.

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