When you take out a mortgage to buy a house, typically the lender expects you to put some money down, too, known as a down payment. This amount will be between 3 and 20 percent of the amount you’re borrowing for the home, depending on the type of loan, the lender you choose and your own creditworthiness. You’ll also need to make an earnest money deposit, which will either be expressed as a percentage of the home’s purchase price or a fixed amount, depending on the preferences of the seller.
Minimum Deposit for Home Loan
A mortgage deposit reduces the amount a lender loans you when you buy a house. Usually, mortgage companies have a minimum down payment amount they’ll require, which can vary based on your credit score and debt-to-income ratio, the home’s purchase price and the policies of your chosen lender. The biggest benefit of a large mortgage deposit is that it reduces the requirement for mortgage insurance with a conventional loan.
Generally, you’ll enjoy a lower minimum deposit for a Federal Housing Administration loan than a conventional loan. However, the Conventional 97 program accepts down payments as low as 3 percent. No matter what type of loan you use, you’ll probably need to put some money down when you put a contract down, known as earnest money or a good faith deposit.
Minimum Deposit for Conventional Loan
Conventional loans come with a down payment requirement, but the amount depends on a variety of factors. Down payment requirement amounts commonly range from 5 percent to 20 percent. You can reduce that amount by taking advantage of something called the Conventional 97 program, which allows down payment amounts as low as 3 percent.
A down payment amount of less than 20 percent will require you to pay for private mortgage insurance, which adds between 0.5 and 5 percent to your originally borrowed amount each year. If you calculate the amount of PMI paid over the years, you can see how much you save simply by putting 20 percent down. If you don’t put 20 percent down, though, you’ll still be able to have PMI removed once you pay your loan down to 80 percent.
Minimum Deposit for FHA Loan
Outside of the Conventional 97 program, you’ll get the best deal on a mortgage deposit with an FHA loan, which will require as little as 3.5 percent down. However, this relies heavily on your FICO score. A FICO score of 580 or higher can qualify for 3.5 percent down, but those with lower scores will have to pay as much as 10 percent.
Unlike a conventional loan, you can’t get out of mortgage insurance on an FHA loan by paying a certain percentage down. You’ll also need to know that the down payment at closing isn’t the only thing a homeowner needs to worry about. Long before you sign the final paperwork, you’ll probably have to hand over money in the form of an earnest money deposit.
Minimum Earnest Money Deposit
When asking about a minimum deposit for a home loan, you may actually be referring to the good faith deposit often required when you put a contract on a house. Also known as earnest money, this amount serves as a commitment to purchase the house, along with the contract you’ve signed, to give the seller the confidence necessary to take the home off the market and start the path toward closing.
Although there is no set rule about earnest money deposit amounts, it’s often a percentage of the purchase price. Some sellers choose a set amount for the earnest money requirement, whether it’s $1,000, $10,000 or something in between. If you’re competing with numerous buyers, a low earnest deposit offer could cost you the house, but an unnecessarily high deposit amount could put you at risk of losing it if something falls through since earnest money is largely nonrefundable.
- The Lenders Network: Conventional Loan Requirements and Guidelines for 2019
- ValuePenguin: How Much Does Private Mortgage Insurance (PMI) Cost?
- The Mortgage Reports: How to Cancel FHA MIP or Conventional PMI Mortgage Insurance
- Investopedia: Earnest Money
- Bankrate: Mortgage Down Payment: What It Is, Who It Goes to and Where It Comes From
- Bankrate: FHA Loans: Everything You Need to Know in 2019
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.