While practical mortgage options exist for as little as 3.5 percent down, at least 20 percent is ideal to avoid paying mortgage insurance. Conventional lenders typically look at 20 percent as a serious investment in the property and consider the loan less risky.Continue Reading
Conventional lenders do issue loans for as little as 5 to 10 percent down, but the borrower normally has to purchase private mortgage insurance to get the funding. PMI often adds 1 percent of the loan balance on to a homeowner's monthly mortgage payments, reports Forbes. Similarly, a borrower can get an FHA loan with just 3.5 percent down, but this government-backed program requires the borrower to pay for FHA mortgage insurance. This insurance includes an up front fee and monthly premiums.
In addition to avoiding mortgage insurance, paying 20 percent down may cause a lender to have more flexibility on debt-to-income ratios. The Consumer Financial Protection Bureau allows a debt-to-income ratio of up to 43 percent on qualified mortgages as of 2014. In some cases, borrowers opt to pay even more than 20 percent down to lower their monthly payments. A higher down payment reduces the debt repayment obligation. Paying more down also creates equity in the home that a borrower can use later through home equity financing.Learn more about Credit & Lending