If you’re looking to buy a house with conventional loan, you’ve probably heard that you need to make a down payment of 20% of the home’s purchase price. But you may be wondering, “Why is 20% considered the ideal down payment?”

A down payment is the amount of money you pay upfront, out of pocket, to buy your home. The minimum down payment that you need to qualify for a conventional mortgage, which is a loan that’s not insured or guaranteed by the federal government, is 5% of the purchase price.

However, for over 30 years, a down payment of 20% has been viewed as the gold standard when buying a home with a conventional loan. The main reason is that it shows lenders that you’re financially ready to take on the responsibility of homeownership. But there are some benefits you’ll see by paying that much money upfront.

• You improve your chances of actually getting the mortgage. For lenders, a 20% down payment reduces the amount of risk that they’re taking on by giving you a loan, since 20% of the home’s purchase price is large investment of your money that you’ll be making.
• You reduce your monthly mortgage payment. By putting more money down, you borrow less. So your mortgage is smaller. And that means you’ll owe less in mortgage payments each month.
• You become eligible for a lower interest rate. So you’ll save money over the life of your loan in interest payments – which is a good thing.
• You don’t have to pay private mortgage insurance (PMI). PMI protects the lender from some or most of their losses in case you default on your loan payments.
• You’ll have instant equity in your home. A 20% down payment may help you stay afloat if the housing market makes a sudden shift, so you likely won’t find your home underwater. An underwater mortgage is when your home is worth less than what you owe on your mortgage. But a large down payment puts a good dent into what you owe on your home. Also, a 20% down payment may offer some protection if you suddenly find yourself in a financial crisis, like losing your job or the death of spouse. Since you’ll have a lower monthly mortgage payment, you may be able to temporarily weather the crisis until you can make some financial changes.

While a 20% down payment is best, for some people, it may not be an option. If you’re looking to buy a home and you have 20%, 10%, 5% or nothing saved to use as a down payment on a home, give the mortgage specialists at Grandview Lending a call at 317.255.0062 or toll-free at 866.690.4920. Our lending experts can work with you to find the right mortgage solution that fits your needs – whatever your down payment situation is.

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