Down Payment For Home Purchase With FHA Loans Versus Other Loans

Down Payment For Home Purchase With FHA Loans Versus Other Loans

This BLOG On Down Payment For Home Purchase With FHA Loans Versus Other Loans Was UPDATED On January 8th, 2019

With the exception of VA Mortgage Home Loans and USDA Loans, all home loan programs require down payment for home purchase. FHA is the most popular loan program in the United States due to Down Payment For Home Purchase With FHA Loans is only 3.5%.

All mortgage loans require two things:

  1. Down Payment : Needs to come from home buyer
  2. Closing Costs: Can be covered with sellers concessions and/or lender credit

VA Loans and USDA Loans are the two mortgage loan programs that do not require down payments. However, all mortgage loans have closing costs.

Closing Costs On Home Loans

As mentioned, there are two types of costs when buying a home.

  • Down Payment on home purchase
  • Closing Costs

The down payment needs to sourced and documented and needs to be verified funds by the home buyer.

Closing Costs can be covered with the following:

Here are examples of closing costs:

  • Title Charges
  • Appraisal Fees
  • Recording Charges
  • Pre-Paids which are upfront escrows
  • One year homeowners insurance
  • Flood Insurance if applicable
  • Appraisal Fees
  • Attorney’s Fess
  • Any other costs associated with the closing of the home loan

Most home buyers do not have to worry about the closing costs.

Down Payment For Home Purchase With FHA Loans

All down payment for home purchase with FHA Loans needs to be documented as follows:

  • FHA requires all down payment for home purchase with FHA Loans be documented 
  • FHA allows down payment for home purchase with FHA Loans to be gifted by family members and/or relatives

The down payment for a home purchase is probably the most biggest challenges most first time home buyers face once they decide to become homeowners.

  • Many potential first time home buyers’s main concern is how much down payment is needed
  • Another concern many first time home buyers have is how much are closing costs

Home buyers do not need to worry too much about closing costs because there are two ways of not having to come out of pocket for closing costs and prepaids:

  1. Sellers Concessions
  2. Lender Credit

Sellers Concessions To Cover Closing Costs

The first way of covering closing costs is to ask for a sellers concession towards the buyers closing costs and prepaids.

  • This can easily be done by inflating the purchase price by the closing cost and prepaids amount
  • Conventional loans allow up to 3% in sellers concessions on primary owner occupant properties
  • 2% sellers concession on investment homes
  • FHA and VA Loans allow up to 6% sellers concessions towards a buyers closing costs and prepaids
  • VA Loans allow up to 4% sellers concessions

Lenders Credit To Cover Closing Costs

The second way of covering closing costs is by lenders credit towards closing costs.

  • A lender can cover most of closing costs in the event home buyers do not get enough sellers concessions
  • Lenders give lender credit by giving borrowers a higher mortgage rate in lieu of giving lenders credit towards closing costs and prepaids
  • Unfortunately, sellers concessions can only be used for closing costs and not down payment

Down Payment For Home Purchase With FHA Loans

Lenders will only accept sourced down payment funding towards the down payment of the borrowers new home.  Cash or mattress money are not allowed as sources for down payment.  All down payment funds must be sourced and verified.

Listed below are acceptable down payment sources to be used towards a residential home purchase.

  • Down Payment Can Come From Borrowers And Co-Borrowers Bank Accounts
    • A two months, 60 days, of the most recent bank statements, may be used to verify savings and checking accounts information
    • Any large deposits over $200 dollars needs to be sourced
  • Cash at hand or in safe deposit box  
    • Cash resources are non existent in the mortgage business
    • Under certain circumstances, cash at hand may be used if borrower can write a detailed letter of explanation on how the cash was accumulated over what period of time
    • Also providing supporting documentation like bills of sale or receipts
    • This is extremely difficult to be accepted by the mortgage loan underwriter but the borrower can try
  • IRA & Retirement Accounts 
    • Lenders will allow up to a 60% value of retirement accounts:
      •  IRA
      • 401k accounts
    • Borrowers are allowed to secure a loan against their retirement accounts   
    • The right hand rule is that borrower can borrower the lesser of 60% of their retirement account or $50,000  
    • In general, borrowers can borrow the lesser of $50,000 or one-half of their  retirement plan
  •  Securities Investment Accounts: Stocks, Bonds, Mutual Funds
    • The lender may use the most recent monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio to verify the value of stocks and bonds
    • The borrower’s actual receipt of funds must be verified and documented
  • Bonds 
    • Mortgage lenders will allow government bonds such as the following:
      • Municipal Bonds at par price
  • Gift Funds
    • Gift funds are allowed for FHA loans:
      • As long as there is a gift letter signed by the donor that he or she does not expect any of the gift money back from the person receiving the gift or repayment plan
      • The person giving the gift needs to be the following people
        • a person who is related to you by blood or marriage
        • Current employer or a labor union the mortgage loan borrower belongs to
        • Charitable institution like a church or a non for profit organization
        • Local, county,  state or federal governmental institution that has an implemented home buyers program that assists first time home buyers aid
        • Or assistant towards their down payment such as providing aid  to low to moderate income families or single parents
  • Liquidation Of Personal Property
    • Bill of sale is provided is allowed for down payment sourcing  
    • Mortgage loan borrower is allowed to sell personal property and use those funds as a down payment source
      • As long as the bill of sale and copy of the cancelled check is provided to the mortgage underwriter
  • The following are allowed
    • Automobiles and motorcycles as well a boats
    • Recreational vehicles and trailers
    • Stamps
    • Gold
    • Silver
    • Coins
    • Memorabilia
  • Proceeds From Sale Of Properties
    • The proceeds from a real estate sale is allowed
      • As long as the borrower can provide an executed HUD from the sale and bank statements showing the deposit into their accounts
  • Collateralized Funds 
    • Funds that are collaterized by a secured asset is allowed can be used for down payment for home purchase with FHA Loans:
      • As long as the borrower can provide the contract and agreement
  •  Employer Contribution
    • Current employer can help home buyers in the following ways:
      • Paying all or part of the employee’s closing costs and prepaids
      • Mortgage Insurance Premium
      • Down Payment On Home Purchase: Either partial or full down payment

Home Buyers who need to qualify for a mortgage loan with a direct lender with no overlays can contact The Gustan Cho Team at Loan Cabin at 262-716-8151 or text for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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