Minimum down payment required for home purchase
If you are planning to purchase a home, mortgage lenders will require a down payment for either a FHA insured mortgage loan or a conventional loan. VA loans and USDA loans do not require down payments.
For FHA loans, the minimum down payment required is 3.5% of the purchase price. Home buyers need to prove that they have the down payment via bank statements, investment account, pension or retirement accounts. In the event if they do not have the required down payment, the down payment can be gifted by a family member. In the event if the down payment is gifted, they need to provide the family member’s name and provide the funds being transferred from the donor’s bank account into the receiver’s bank account. The donor’s bank statement needs to be submitted to the lender and the gift funds must have been seasoned at least 30 days in the donor’s bank account. A formal gift letter needs to be signed as well.
For conventional loans, there are 3% minimum down payment loan programs and 5% minimum down payment loan programs. Conventional loans generally have higher mortgage rates than FHA insured mortgage loans. Similar to FHA loans, the down payment needs to be documented. If the home buyer does not have enough money for the down payment, the home buyer can receive a gift from a family member for the down payment. Like FHA loans, all gifts must be documented and proof needs to be provided by the donor via leaving the donor’s bank account and going into the receiver’s bank account. The donor’s past 30 days bank account need to be provided to prove that the down payment has been seasoned for 30 days.
Besides the down payment, the home buyer needs to come up with third party closing costs. However, closing costs can be provided via seller’s concession or lender’s credit towards closing costs.
A seller’s concession towards the buyer’s closing costs is very common. With FHA loans, the seller can contribute a maximum of 6% of the purchase price towards a buyer’s closing costs which includes pre-paid closing costs. With conventional loans, the seller can contribute a maximum of 3% of the purchase price towards a buyer;s closing costs. Make sure you do not too much closing cost credits because the left over goes back to the seller and the seller is not allowed to give the buyer the cash difference.
Lender’s Credit Towards Closing Costs
In the event if the seller is not willing to give the buyer a sellers concession and the home buyer does not have enough money to come up with the closing costs, the buyer can request a lender’s credit towards closing costs by accepting a mortgage rate slightly higher. For example, if the borrower has a mortgage rate of 4.0%, the borrower can accept a mortgage rate of 4.25% and get a lender’s credit towards closing costs.
All in all, the bottom line is that all you need is the minimum down payment to purchase a home. Closing costs can be covered either by a sellers concession or a lender credit.