Down payment and savings

How the down payment changes the loan

Lenders express the down payment through the loan-to-value ratio, which compares what you borrow with the appraised value of the home. A higher down payment lowers the ratio. The CFPB explains that lenders use it to decide whether to lend, whether mortgage insurance or a government-backed loan is required, and what rate to offer, with higher-ratio borrowers usually offered higher rates.

Minimums differ by program. FHA's minimum investment is 3.5 percent in most cases. Fannie Mae's HomeReady and Freddie Mac's Home Possible allow 3 percent down for eligible borrowers. VA and USDA guaranteed loans can be made with no down payment for those who qualify. Lenders can require more than the program minimum.

The rest of the cash

A down payment is not the only cash you need. Plan for an earnest money deposit soon after your offer is accepted, an inspection and sometimes an appraisal paid before closing, closing costs, prepaid items such as the first year of homeowners insurance and an initial escrow deposit, and moving costs. The CFPB reminds buyers to factor in points, closing costs and early repairs alongside the down payment.

Then keep something back. Reserves are money you still have after closing. Some loans require them, but even when they are not required, a cushion is what keeps a surprise repair from becoming debt.

Where the money can come from

Savings are the simplest source, and the easiest to document. Gifts from relatives are common and are allowed by many programs with a gift letter and proof of the transfer. Down payment assistance from state and local programs can cover part of the cash. Retirement accounts are possible sources, but withdrawals and loans have tax and long-term costs, which the taxes file covers with tax-year labels.

Whatever the source, lenders want a paper trail. Large deposits that are not your regular pay usually need an explanation and documentation. Moving money between accounts right before applying can create more questions, not fewer.

Combining several sources

Most down payments are built from several sources: your own savings, a gift from a relative, a grant or second loan from an assistance program, and sometimes a retirement plan loan. Each source has its own paperwork. Savings need statements, gifts need a letter and a transfer record, assistance needs program approval, and plan loans need the plan's documents. Decide early which sources you will use, and tell your lender before money moves, so every dollar can be traced without delay. The guides on a savings plan and on gift funds explain the details.

Keeping a cushion after closing

The down payment gets the attention, but the money left in the bank on moving day matters just as much. New owners face repairs, the first tax or insurance bills that escrow did not fully cover, and the ordinary costs of moving in. Putting every dollar into the down payment can lower the monthly payment slightly while leaving no room for a broken water heater. A smaller down payment can mean mortgage insurance, yet it may leave several months of expenses in savings. Some loans also require reserves, a set number of months of payments left in your accounts after closing. Before you decide how much to put down, list the cash to close, a moving budget and an emergency fund, and see what remains. The guide on down payment versus emergency fund includes a calculator that shows how many months of expenses each choice leaves you.

How to use this file

Begin with the guide on how much to put down. It compares the cash and the loan-to-value at each common minimum, with a calculator you can fill in. Then open the guides on gifts, documentation and saving plans. If the gap still looks large, the assistance file explains how state and local programs work and how to find the ones that serve your area.