Is 5% Enough of a Down Payment for the Seattle Area?

As a Seattle-area mortgage company, we like to address questions that are frequently asked by local home buyers. Today, we’ll cover a question relating to down payment requirements for a mortgage loan.

Is 5% enough of a down payment in the Seattle area?

The short answer is yes. Many home buyers can qualify for a mortgage loan with as little as 5% down. Some programs allow you to make an even smaller investment. Military members and veterans could qualify for a VA loan that allows for 100% financing.

Is 5% Enough of a Down Payment in Seattle?

When researching the home buying and mortgage loan process, you’ve probably seen mention of a 20% down payment. Some borrowers choose to put 20% down, because it allows them to avoid mortgage insurance.

But you don’t necessarily have to make an investment of that size. In fact, many home loan programs available in the Seattle area allow borrowers to down much less than 20%.

Putting 5% down could qualify you for a variety of mortgage options, including conventional, FHA and VA. The minimum investment for an FHA-insured home loan is just 3.5%. But even conventional or “regular” mortgage loans offer down payments below 5%. Some conventional home loan programs allow borrowers to put down as little as 3%.

And then we have the VA loan program for military members and veterans, which allows for 100% financing in many cases.

There are some scenarios where a larger down payment might be necessary. For instance, borrowers taking out a jumbo loan (that exceeds the conforming loan limits for their county) often have to invest more. But in general, a 5% down payment is enough for most mortgage loan programs in the Seattle area.

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Where Mortgage Insurance Comes into the Picture

If you put 5% down on a home purchase in Seattle, Washington, you might be required to pay for mortgage insurance. These policies are usually required when the loan-to-value (LTV) ratio rises above 80%, which is what happens when you put down less than 20%.

In the grand scheme of things, mortgage insurance is not particularly expensive. But it does increase the size of your monthly payments, so it’s something to consider.

For many Seattle-area home buyers, the ability to make a smaller down payment more than makes up for the slight increase in payments brought on by mortgage insurance.

Using a ‘Piggyback’ Loan With 5% Down

There are ways to avoid mortgage insurance, even with a down payment of 5%. One strategy is to use what’s known as a “piggyback” loan. This is where the home buyer takes out a primary mortgage for a certain percentage of the price, a second mortgage for a lesser amount, and makes a down payment for the remainder.

For example, the 80/15/5 piggyback strategy would allow a borrower to put down 5% on a home purchase. The two combined mortgage loans (80% and 15%) would cover the remaining 95%. So in this scenario, neither one of the loans exceeds 80% of the home value. This allows home buyers to put down 5%, while avoiding mortgage insurance at the same time.

In the current market going with either standard PMI, upfront PMI or lender paid PMI is usually cheaper and a better option than using a 1st and 2nd combo. The point is, you have a lot of financing options when buying a home in the Seattle area. And a 5% down payment could be more than sufficient.

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Don’t Forget about Gift Money

Many of the mortgage programs available these days allow borrowers to use gift money from an approved third-party. For example, a family member could provide you with funds to help cover your down payment expense. As long as it’s truly a gift, and not a short-term loan, this kind of donation is typically allowed.

There are some requirements that go along with this. The person providing the funds must also provide a signed letter that says they don’t expect repayment. But it’s a fairly straightforward process, and it could help you purchase a home in the Seattle area with less money out of pocket.

This article provides a basic overview of the down-payment requirements for a mortgage loan. It’s intended for a general audience, so some portions might not apply to your particular situation. If you have any questions about qualifying for a mortgage loan in the Seattle area, please contact our knowledgeable staff.