The three key elements of any mortgage application is the down payment, income, and credit history. The reason that the down payment is listed first is that banks base their decisions on whether to approve a particular application or not based on the amount of risk they see for themselves. A larger down payment reduces the likelihood of a borrower defaulting on their mortgage obligation.
Down payment of 20% or more: tells the bank that the borrower is highly unlikely to default.
Down payment of less than 20%: will prompt lenders to obtain mortgage insurance (MI for short) that covers them in case of non-payment. The borrower pays the monthly premium.
FHA (Federal Housing Authority) insured mortgages: will allow as little as 3.5% down payment but the monthly MI premium and up-front charge are hefty.
Now, let’s talk about various homebuyer assistance programs that exist. There is a great variety of both federal and state/city programs that provide down payment money in the form of loans or grants. Keep in mind that a lot of these programs have limited funding and once a program uses up all the money it had available, it closes until the next round of funding is obtained. Here are a few examples of such programs, based on state/city:
New York City
And a program specifically for Federal (military personnel or veterans)
When looking into any such program, there are 4 things you want to inquire about:
1. Are there certain income limits that a borrower cannot exceed?
2. Are there geographical restrictions?
3. Are there property type restrictions?
4. Is there a minimum number of years a buyer has to live in the property and what are the consequences if they sell before this time?