This BLOG On Down Payment Requirement For FHA Home Purchase In Illinois Was UPDATED And PUBLISHED On January 1st, 2019
Home Buyers in Illinois need less money to bring to closing than any other states on a home purchase.
- Illinois property taxes are paid in arrears so the seller needs to give a property tax proration credit to home buyers
- Property taxes in Illinois are paid one year in arrears so one year’s property taxes are due to the home buyer at closing
- The good news is that homebuyers can use the property tax proration credits for their down payment requirements for FHA Home Purchase
- Borrowers still need to show that they have documented 3.5% down payment for the home purchase but do not have to bring the whole 3.5% down payment to closing
- For example, if the home buyer has a $100,000 purchase contract, the Down Payment Requirement For FHA Home Purchase would be $3,500
- The buyer needs to show that they have the $3,500
- However, if the property tax on the proposed purchase property were $3,000, the seller will need to credit the buyer $3,000 and the net amount the buyer needs to bring to closing would be $500
There are times in Illinois where a home buyer can get cashback at closing due to property tax proration credits. With the combination of property tax prorations and sellers concessions, a home buyer in Illinois may be able to purchase an Illinois home with no money out of pocket.
Why Lenders Require Down Payments
Lenders require that a homebuyer puts down a minimum down payment when purchasing a home in order for the lender to grant the borrower a residential mortgage loan. The U.S. Department of Housing and Urban Development (HUD) is the parent of FHA and sets FHA Guidelines on down payment requirements for FHA Home Purchase.
- The more down payment a homebuyer puts down on a home, the less risk tolerance the lender has and the more skin in the game the borrower has
- The larger the down payment a homebuyer puts down on a home purchase, the lower their mortgage rate will be since the mortgage lender’s risk tolerance level gets reduced
- 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
- This is 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
We will be focusing on FHA loan down payments on this blog.
Minimum Down Payment Requirement For FHA Home Purchase
The minimum Down Payment Requirement For FHA Home Purchase is 3.5% on residential units from 1-4 residential units. Down Payment Requirement For FHA Home Purchase is minimal and mortgage rates are low because of the government guarantee to lenders. FHA is a government agency and not a lender. FHA’s role is to insure banks and lenders who fund FHA Loans in the event borrowers default on their FHA Loan and the property goes into foreclosure.
- 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 has been gifted the funds does not have to pay the funds back to the donor of the down payment funds
- HUD 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 30-year FHA Loan.
How Much Money Is Required To Close On FHA Loans
Home Buyers who are concerned with the minimum Down Payment Requirement For FHA Home Purchase and the minimum closing costs and want to spend as little as possible, a loan officer can go over the Loan Estimate.
- Homebuyers who are dealing with a realtor, most real estate agents work closely with lenders
- Home Buyers need to consult with a lender with a combination of an aggressive no-nonsense realtor to see how to structure the home purchase contract so they can come out in being a homeowner with as little money out of pocket as possible
Buying Home With Little To No Down Payment
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
- HUD allows up to a 6% sellers concession towards a buyers closing costs
- Make sure you do not waste a sellers concession because if there is leftover money after paying a buyers closing costs
- It goes back directly to the seller so home buyers do not want to waste any part of a sellers concession
- By getting enough sellers concession, home buyers do not have to worry about any closing costs or prepaid
- Escrows will be set up, insurance will be paid, and all other closing costs will be paid with sellers concessions
If borrowers are short in closing costs with sellers concessions, the lender can give a lender credit towards closing costs in lieu of a slightly higher mortgage rate.
Down Payment Requirement Needs To Be Seasoned
Home Buyers must show that you have the 3.5% down payment on their account. Down payment funds need to be sourced seasoned funds or are a gift from a close family member.
- When borrowers get clear to close, will get a Closing Disclosure (HUD Settlement Statement) which is a form with all estimated closing costs and charges that apply to the buyer and the seller
- The Closing Disclosure (CD) will state a bottom-line figure for the home buyer to bring cash to the closing
- However, unless it is a brand new home, homebuyers in Illinois 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, buyers will not need the full 3.5% to close on their home purchase
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 in Illinois.
Minimum Down Payment Requirement For FHA Home Purchase With Credit Scores Under 580
Borrowers with credit scores that fall under 580 FICO, the minimum Down Payment Requirement For FHA Home Purchase is 10% of the purchase price.
- In the event home buyers do not have the 10% minimum down payment required due to lower credit scores, they might want to see in improving and boosting their credit scores
- Most loan officers can help borrowers repair boost credit scores before mortgage application gets processed and underwritten
Home Buyers or Homeowners with any questions on Down Payment Requirement For FHA Home Purchase, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends, and holidays.