Mortgage Guide

Everything You Ever Wanted To Know About Mortgages

Your Down Payment & LTV Effect Your Mortgage Payment

The down payment presents the biggest obstacle to homeownership for most buyers, especially first-time buyers and those in lower income brackets. Fortunately for those people, lenders have become more willing to underwrite mortgages with small down payments.

Most mortgage lenders require a cash down payment of 5, 10 or 20 percent of the sale price. Some lenders have zero-down mortgage programs. If you can put down more than your lender requires, say 25 to 30 percent, your lender may be willing to overlook past credit blemishes, approve your loan without verifying your income or both. If you come up short on the down payment, less than 20 percent of the buy price, you may have to obtain private mortgage insurance (PMI) to protect the lender before your loan is approved.

You can often lower your mortgage payment or afford a more expensive house by putting more money down.

Lowdown on down payments

Say you make $40,000 a year. Your maximum monthly mortgage payment (28 percent of gross income) would be $933. Assuming your total monthly debt is no more than $1,200 (36 percent of gross income), the bigger the down payment, the more expensive the house you can buy. For instance, say the monthly mortgage payment of $933 has an interest rate of 7.5 percent. In a 30-year fixed-rate mortgage, that monthly payment covers a total principal of $133,435.45. With 10 percent down, that mortgage would cover a house worth $148,262. With 20 percent down, the house price would be $166,794.

Say you want to keep the monthly payment to $1,060. How large of a mortgage can you get? The charts below consider the key factors of interest rates, down payment amount and the length of mortgage term.

30-year mortgage House Price

Interest rateMonthly paymentAffordable price with 5% downAffordable price with 10% downAffordable price with 15% downAffordable price with 20% down

15-year mortgage House Price

Interest rateMonthly paymentPrice with 5% downPrice with 10% downPrice with 15% downPrice with 20% down

How much house can you afford? to calculate your down payment. If you are selling a home, you can apply the equity as a down payment on the new house. Note: You need to include an estimate of closing costs in buying the property (plus selling costs if you're also selling a house). Closing costs are generally 3 to 5 percent of the sale price.

Now that you've calculated what your down payment will be, here are some tips to help you meet your goal:

  • Have your down payment ready at least 60 days before you apply for a mortgage loan.
  • Start saving now and forego other expensive cash buys, such as a new car or vacation trip.
  • Borrow your shortfall from the equity in your 401(k) retirement plan. You will be charged prime rate with possibly a small margin added on, but you'll meet your down payment goal and you can repay your retirement fund through your payroll deduction plan.
  • Borrow from family or relatives and pay them back monthly. Lenders may require you and your family lender to sign a 'gift letter' indicating that both parties consider this a gift before they will factor the amount into the loan.

If you still come up short on the down payment, don't despair. There are special mortgages and first-time home buyer programs to help you buy your dream home.