The “gold standard” for a down payment is 20 percent of the home’s purchase price. If you can afford to put down 20 percent, you will avoid paying private mortgage insurance (PMI). Private mortgage insurance insures the lender against possible default.
Borrowers who put down less than 20 percent are considered by lenders as higher credit and default risks. In these cases, borrowers must purchase Private Mortgage Insurance (PMI), and pay for it every month along with their monthly mortgage payment. Typically buyers will continue to pay PMI until the mortgage falls to 80% of the property’s current market value or when the mortgage value reaches 78% of the original appraised value of the property.
Many lenders offer programs that will accept down payments of as little as 5 percent. Some government programs, such as the Federal Housing Administration (FHA) and Veteran’s Administration (VA) have even lower down payment requirements for qualified borrowers. But typically, anything less than 20 percent down will require that you purchase PMI.
You can also use a gift toward a down payment. Some programs may limit gift amounts or credits. Your lender will want to see a letter from the gift giver to you detailing the amount of the gift and that it is indeed a gift with no repayment expected. You may also be required to provide financial documents showing where the gift came from and that you received and deposited it. If you do receive a gift to be used toward a down payment, be sure to keep the proper paper trail.