Q: The home I am buying was listed for $269,900. I offered $275,000 to win the bid. The home was appraised for $270,000. I was approved for a loan of $270,000 before the appraisal. Do I still need to come up with a down payment if the approved loan amount is the same as the appraised value?
A: Yes, you will still need to come up with a down payment from your own funds.
Loans made at 100 percent of the value of the home are very rare nowadays, mostly limited only to certain audiences eligible for financing though the VA and USDA loan programs.
In general, you'll need to put down a minimum of 3.5 percent of the purchase price (for an FHA-backed loan) or usually about 10 percent (but possibly as little as 5 percent) for conventional financing. Certain issues, like a low credit score, for example, may see the lender require a larger down payment to help offset the risk that a low score or weak credit history presents.
The lender will generally allow you to borrow ("leverage") the home up to a given level; in this instance, if the value of the home is $275,000 and the lender will lend you up to 90 percent of the value of the home, you'll need a down payment of $27,500 (a 10 percent down payment, 90 percent loan-to-value loan, leaving a mortgage amount of $247,500). If the lender is able to offer you 95 percent financing, you'll need to come up with a 5 percent down payment of $13,750 -- leaving a $261,250 loan amount.
Be prepared to pay mortgage insurance
In all cases, down payment amounts of less than 20 percent will require mortgage insurance, which will affect your costs and the amount of money you can borrow. However, depending upon your situation and how long you think you'll be in the home, it can be beneficial to put more (or even less) down. That decision is the purpose behind HSH.com's Down Payment Decisioner Calculator, which can help you to see how interest and mortgage-insurance costs are affected by the size of your down payment choice both today and in the future.
Why are down payments required?
Financing at the 100 percent level -- where the borrower has "no skin in the game" -- was among the gimmickry implicated in the most recent housing market collapse. Borrowers who don't put any of their own money into the transaction have nothing to lose, and are less likely to want to keep making payments if things become economically difficult for them. That puts the lender at risk of loss, so that is why a minimum down payment is required today.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.