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How much money will you have to have to qualify for a mortgage? Ideally, 20 percent of the home's purchase price. That threshold offers several benefits:
- Better chance of approval. Starting in the late 2000s, and in response to the subprime mortgage meltdown, lenders ratcheted up the requirements for mortgages, requiring higher credit scores, bigger down payments, and proof that you're likely to keep your job. Some lenders eliminated so-called piggyback loans, which let home buyers borrow part of their down payment as a second mortgage. If you can't pony up 20 percent of your home's purchase price, lenders may consider you at greater risk of defaulting on your mortgage, meaning you won't be able to make payments.
- Lower interest rates. When you can afford a down payment of 20 percent or more, lenders see you as less of a risk, and your interest rate reflects this.
- No PMI. Lenders' confidence in 20-percenters excuses those buyers from paying for private mortgage insurance, too. If you get a mortgage with less than 20 percent down, lenders require that you get PMI, which protects the bank from loss if you fail to repay your loan. Depending on your credit score, which measures your creditworthiness based on your financial history, and other factors, PMI costs from 0.5 to 1 percent of your mortgage.
- Lower payments. When you make a higher down payment, you borrow less money. And that means you have less to pay back - each month and over the life of the loan.
- Instant equity. One of the financial advantages of buying a home is building equity, and a hefty down payment gives you a head start.
