If you’re looking to buy your first home, or if you’ve purchased before, there are a number of things you need to know about a down payment, asset reserves and other matters. First, you’ll likely have to obtain a conventional or a Federal Housing Administration (FHA) mortgage.
If you’re looking for a conventional mortgage, you’ll typically be looking at putting down between 5% and 20%. It will depend on what your credit looks like, because most conventional mortgage holders will have credit scores above 720. Scores below that will have some type of premium associated with them and make for a more costly loan.
Conventional mortgages require a minimum of two months of asset reserves as well as mortgage insurance on purchase transactions with less than 20% equity.
FHA mortgages require a minimum of 3.5% down and, depending on the lender, will allow you to have a credit score in the 640-to-660 range.
Unlike conventional mortgages, there are no asset reserves that are required. However, monthly mortgage insurance is always required, regardless of the amount of down payment.
The greatest difference between conventional and FHA mortgages lies in what is called up-front mortgage insurance. Up-front mortgage insurance is basically a onetime premium that is paid by you, at closing, to the lender. The premium can be financed.
Being that the FHA is allowing lower credit scores and lower down payments than conventional mortgages are, there is more risk in lending the money. Lenders offset this risk with more coverage for themselves.