Why A Down Payment Is So Important

How Much Should You Put Down On A Home Purchase

There was a time when mortgage lenders relaxed home buying rules and authorized home loans even when buyers had a minimum amount of money to put down. That plan backfired and many homes went into foreclosure.

Downpayment rules have recently become more stringent than they were just a few years ago. In 2009, the opens in a new windowFederal Housing Authority (FHA) increased its downpayment requirement from 3 percent to 3.5 percent. Fannie Mae and Freddie Mac require at least a 5 percent downpayment. Even then, buyers may think that amount of a downpayment has given them at least some equity in their new home, when in fact, it most likely has not.

Lenders base their loan decisions on the appraised value of the home. That is partly a subjective process, and any downpayment of less than 5 percent may not provide the owner with any equity at all when the house is re-appraised a few months later.

If you are planning on purchasing a home, here are some good reasons for lenders to ask for a substantial downpayment and not to relax their rules. Believe it or not, in the long run, these requirements also benefit buyers.

  • The more money you have to put down, the more likely it is you will be approved for the loan. Lenders believe that if you have some of your own money invested in the home, the less likely it is that you will default on the home loan. You will not want to lose your investment money.

  • The more money you put down on a home, the lower your monthly payments will be since the amount of the loan is decreased. This makes it more likely you will be approved for the loan.

  • Interest rates are often lower when the amount of the downpayment is increased. In addition to a lower monthly payment, you will be paying less money for your home over the life of the loan.

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