Minimum Down Payment Requirement For Home Buyers
Mortgage lenders require that a home buyer puts down a minimum down payment when purchasing a home in order for the mortgage lender to grant the borrower a residential mortgage loan. The more down payment a home buyer puts down on a home, the less risk tolerance the mortgage lender has and the more skin in the game the borrower has. The larger the down payment a home buyer puts down on a home purchase, the lower their mortgage rate will be since the mortgage lender’s risk tolerance level gets reduced. Mortgage lenders feel that the larger the down payment a mortgage loan borrower puts down on a home purchase, the less the chances for the borrower has to default on their mortgage loan because in the event of default and foreclosure, the borrower will lose all of their down payment as well as all of the equity they have on their home. There are various minimum down payment requirements depending on the mortgage loan program the home buyer chooses, however, we will be focusing on FHA loan down payments on this blog.
Minimum down payment requirement for a FHA loan
The minimum down payment requirement for a FHA loan is 3.5% on residential units from 1-4 residential units. FHA allows non occupied co-borrowers to be on the loan in the event if the borrower does not qualify due to high debt to income ratios. FHA also allows the down payment to be gifted by a family member. Gift funds must be sourced and a gift letter needs to be signed certifying that the person who have been gifted the funds does not have to pay the funds back to the donor of the down payment funds. FHA also allows up to a 6% sellers concession towards a buyers closing costs. Sellers concessions can be used to pay all of the borrowers closing costs including the upfront mortgage insurance premium, discount points, and prepaid items. FHA annual mortgage insurance premium is required for the duration of the mortgage loan.
How much money will be needed to close on a FHA loan
If you are concerned with the minimum down payment requirement and the minimum closing costs and want to spend as little as possible, I would seek the consultation of a mortgage broker prior to going home shopping. If you are dealing with a realtor, most real estate agents work closely with lenders. You need to seek a creative mortgage lender with a combination of an aggressive no-nonsense realtor to see how you want to structure your home purchase so you can come out in being a homeowner with as little money out of pocket as possible.
There are many cases where I have helped first time home buyers purchase their home with very little or no money out of their pocket. First of all, get a sellers concession towards a buyers closing costs. FHA allows up to a 6% sellers concession towards a buyers closing costs which includes prepaid. Make sure you do not waste a sellers concession because if there is left over money after paying a buyers closing costs, the seller can give that balance back to you. It goes back directly to the seller so you do not want to waste any part of a sellers concession. By getting enough sellers concession, you do not have to worry about any closing costs or prepaids. All of your escrows will be set up, insurance will be paid, and all other closing costs will be paid.
Down Payment Requirement Needs To Be Seasoned
You must show that you have the 3.5% down payment on your account whether they are sourced seasoned funds or is a gift from a close family member. When you get a clear to close, you will get a pre-HUD which is a form with all estimated closing costs and charges that apply to you, the buyer, and the seller. You will get a bottom line figure for you to bring cash to the closing. However, unless it is a brand new home, you will be getting a tax proration from the sellers for the prior years property taxes. This can be a large credit if the property taxes are high and in most cases, you will not need the full 3.5% to close on your home. I have seen many cases where the home buyer does not have to bring any cash to the closing and actually gets a check back.
Minimum down payment requirement for borrowers with credit scores between 530 FICO and 580 FICO
If you are a mortgage loan borrower who has low credit scores and your credit scores fall within the 530 FICO and 580 FICO, the minimum down payment requirement is 10% of the purchase price on FHA loans. In the event if you do not have the 10% minimum down payment required due to your lower credit scores, you might want to see if your mortgage broker can help you repair your credit and boost your credit scores before your mortgage application gets processed and underwritten.