First off, the standard down payment required to qualify for a mortgage is 20% so it is unusual that your lender is requiring you to make a 25% down payment. One potential reason your lender may be making this request is to lower your mortgage amount and monthly payment.
The larger your down payment, the lower the mortgage amount you need to buy the home. Reducing your loan amount also reduces your monthly payment, which may improve your ability to qualify for the mortgage, depending on your monthly gross income and debt expense.
For example, if you want to buy a $100,000 home, you may be able to qualify for a $75,000 mortgage but not an $80,000 mortgage. If you have sufficient funds to make the higher down payment -- $25,000 in this case -- and you can afford a $75,000 mortgage, then you can buy the home.
If you can only afford a $20,000 down payment but you cannot qualify for a $80,000 mortgage, then you cannot buy the home. In reality, your lender may not be requiring a higher down payment, but rather a smaller, more affordable mortgage amount.
My first recommendation to you is to contact other lenders in the table below and compare their loan terms and down payment requirement to your current lender. You may be able to find a lender that permits a lower down payment or a lender that offers a lower mortgage rate, enabling you to qualify for a higher loan amount and save money on your mortgage.
Low Down Payment Mortgage Programs
My second recommendation is that you consider a low down payment mortgage program. These programs enable you to buy a home with a down payment between 0% and 3.5%, which is significantly lower than the 25% required by your current lender. Program qualification guidelines including minimum down payment, applicant credit score, maximum debt-to-income ratio, mortgage limits, income limits and property type vary by program.
For example, the FHA mortgage program requires a down payment of 3.5% while the USDA home loan program enables you to buy a home with no money down. Some programs are available to repeat home buyers while others require you to be a first-time home buyer to qualify. You can review the resources below to determine the low down payment program that is right for you.
Review Low Down Payment Mortgage Programs
Use the FREEandCLEAR Lender Directory to search over 3,900 lenders by loan program. For example, you can find top-rated lenders in your state that offer 25 different mortgage programs including multiple low down payment options.
Down Payment Assistance Program
Down payment assistance programs can help pay for all or part of your down payment when you buy a home. In some cases these programs are offered as grants but they are usually structured as a subordinated second mortgage -- also called a silent second mortgage -- that you are not required to pay until you sell your home or refinance your mortgage.
For example, if you want to buy a home for $100,000, you could obtain a $80,000 mortgage and apply for a $20,000 down payment assistance program. The mortgage and assistance program combine to enable you to purchase the home while minimizing how much money you personally put down.
Review How Down Payment Assistance Program Work
In many cases, down payment assistance programs are used with a low down payment mortgage, especially for home buyers with limited financial resources. You are also required to pay closing costs and potentially hold money in reserve when your loan closes so these programs help bridge the financial gap to buying a home.
Down payment assistance programs are usually provided by HUD-approved local housing departments or commissions. Your local housing department may also offer other homebuyer assistance programs that are applicable to you. Visit the HUD website below and select your state to learn more about available programs.
HUD State Resources Web Site
The final option to consider is to use a second mortgage, also called a piggyback loan, to pay for part of the down payment required by the lender. For example, if the lender requires a 25% down payment and you can put down 15% of the purchase price with your own funds, you can use a second mortgage for the remaining 10%.
Review How a Second Mortgage Works
A second mortgage is usually a less appealing financing option than a low down payment mortgage or a down payment assistance program because they can be challenging to qualify for. Second mortgages also increase your total monthly housing expense because you have an additional monthly loan payment.
While a second mortgage may make financial sense for certain home buyers, be sure to weigh the positives and negatives and review all of the financing options available to you. With the right lender and mortgage program you should be able to buy a home with a down payment of less than 25%.
"Standard Eligibility Requirements." Eligibility Matrix. Fannie Mae, October 2 2019. Web.« Return to Q&A Home About the author