Q-How low can the down payment be, and how does it affect the type of mortgage?
A-Most conventional mortgages are available to the home buyer who has a 20 percent or greater down payment. However, lenders will require that you take out private mortgage insurance (PMI) for loans with less than a 20 percent downpayment.
According to Thomas Theobald, Midwest regional vice president for MGIC (a national provider of mortgage insurance), most of their policies are written for 10 percent down mortgages, while a fifth are directed towards the 5 percent down market.
The guidelines for the secondary markets (Fannie Mae, Freddie Mac) where mortgages are subsequently sold require only a 5 percent down payment for a single-family residence. However, the lender still retains the option to require stricter standards depending on a variety of factors, such as credit and job history. You should note that regardless of the amount of your down payment, the debt to credit ratio will remain 28/36.
The popular 5/25 and 7/23 balloon loans require a 10 percent down payment. FHA loans require only a 3 to 5 percent down payment, and the Department of Veterans Affairs may require none.
Q-Does the type of mortgage affect the amount of earnest money we must put down?
A-The amount of earnest money that a purchaser and seller decide on is as negotiable as the purchase price. Earnest money is the initial cash deposit given by the purchaser to the seller as a sign of good faith. It is held by a third party in an escrow account. It is used later as part of the down payment toward the purchase.
Earnest money is expected to compensate the seller (and possibly the real estate broker) if the buyer defaults on the contract. There is no specific rule requiring a certain percentage of earnest money and the practice varies by state and region; but the normal range is anywhere from $1,000 to 5 to 10 percent of the purchase price.
