What Are Down Payment For Home Purchase Requirements
This BLOG On What Are Down Payment For Home Purchase Requirements Was UPDATED On July 29, 2017
Home Buyers who are planning to purchase a home have two types of costs they need to come up with.
- Down Payment For Home Purchase Requirements
- Closing Costs
Mortgage lenders will require a down payment for home purchases because they want the borrower to have skin in the game. Statistics prove that if a home buyer puts down their hard earned money, the chances of foreclosure reduces. The more down payment a home buyer puts down on a home purchase, the more skin in the game the mortgage borrower has and the less risk the lender has. The two loan programs that do not require down payment and offer 100% financing are the following:
- VA Loans
- USDA Loans
Down Payment For Home Purchase Requirements On FHA Loans
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.
- First time home buyers can qualify for Conventional Loans with 3% down payment.
- First time home buyers are those who had no ownership on a home for the past 3 years.
- Seasoned home buyers require 5% down payment on owner occupant homes.
- Second homes require 10% down payment on Conventional Loans.
- Conventional loans generally have higher mortgage rates than FHA insured mortgage loans.
- Private Mortgage Insurance is required on conventional loans with less than 20% equity.
- 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.
NON-QM Loans And Bank Statement Mortgage Loans For Self Employed Borrowers
Alternative Financing is back. NON-QM Loans are non-conforming alternative loan programs where there is no waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale. There are no loan limit caps since they do not have to conform to Fannie Mae and/or Freddie Mac Guidelines. Bank Statement Mortgage Loans For Self Employed borrowers are mortgage loans that will just go off 24 months averages of the borrower’s bank statements. Tax returns are not used so write offs and deductions do not matter. NON-QM and Bank Statement Mortgage Loans require 10% to 20% down payment. Borrowers of NON-QM and Bank Statement Loans for Self Employed Borrowers can get up to 6% in sellers concessions to cover closing costs.
Besides the down payment, the home buyer needs to come up with third party closing costs. Closing costs are any costs related to closing the home loan.
Here are examples of closing costs:
- Origination Fees
- Title Charges
- Recording Fees
- Appraisal Fees
- Transfer Stamps
- Attorney’s Fees
- Appraisal Fees
- One year homeowners insurance
- Any other costs involved in closing the home loan
- Discount Points
Sellers Concessions is when a home seller gives a home buyer a monetary credit for closing costs. Each loan program has a cap on the maximum sellers concession a home seller is allowed to give a home buyer. Sellers concessions can only be used to cover buyer’s closing costs and cannot be used for the down payment. Any overage in sellers concessions need to go back to the home seller and cannot be given as a kick back to the home buyer.
- 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 and USDA 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 for owner occupant homes and 2% sellers concessions for investment properties.
- VA Loans allow 4% sellers concessions.
- 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.