Down Payment Requirements On Home Purchases
There is a minimum down payment requirement on home purchase on most loan programs. Most home mortgage loan programs require a down payment on a home purchase loan. The down payment shows the borrower has skin in the game. Mortgage companies view the borrower as less risk if the borrower puts a larger down payment. The down payment or loan to value is one of the most important factors when determining the mortgage rates of the borrower. The larger the down payment or lower the loan to value, the lower the risk which means the lower the rate.
The only two loan programs that do not require down payment on home purchase are the following:
- VA Loans
- USDA Loans
VA Loans and USDA Loans do not require any down payment requirements on home purchases. This is because these loans are insured and guaranteed by the Department of Veteran Affairs and the U.S. Department of Agriculture Rural Development. All home purchases have closing costs. Most homebuyers will have closing costs covered with a seller concession and/or lender credit. The loan officer can structure the closing costs required by borrowers with quarterbacking the home purchase negotiation with the seller by discussing it with the buyer’s real estate agent.
Down Payment Requirements On Home Purchases On Government And Conventional Loans
Homebuyers do not have to put any down payment on VA and USDA loans. Lenders offer 100% financing at great competitive rates on VA and USDA loans due to the government guarantee. In the event, the borrower defaults on a government-backed mortgage, the government agency will partially guarantee the loss of the lender. HUD, the parent of FHA, requires homebuyers to put a 3.5% down payment on a home purchase FHA loan. Conventional loans require a 3% down payment for first-time homebuyers and 5% for seasoned homebuyers. Per Fannie Mae and Freddie Mac agency guidelines, a first-time homebuyer is defined as a buyer who has not owned a home in the past three years. Private mortgage insurance is required for homebuyers who put less than a 20% down payment on a home purchase on conventional loans. Conventional loans are not government-backed loans. However, lenders need to follow Fannie Mae and/or Freddie Mac GSE agency guidelines. Lenders fund conventional loans using their warehouse line of credit. After they fund the loan, lenders need to sell the loan that is funded on the secondary market. Fannie Mae and Freddie Mac are the two largest financial institutions that purchase mortgages on the secondary market. Fannie Mae and Freddie Mac’s role is to provide market stability by purchasing funded loans from mortgage companies. This is how lenders are able to continue originating and funding loans. Mortgage lenders of conventional loans follow the strict lending requirements of Fannie and Freddie so they are able to sell the loans they fund and pay down the warehouse line of credit so they can keep on originating and funding more loans over and over again. FHA and Conventional loans are the two most popular loan program in the nation due to the low down payment requirements. FHA, VA, USDA loans are for owner-occupant properties. Second homes and investment properties are not eligible for FHA, VA, USDA financing. Conventional loans and non-QM loans have loan programs for second homes and investment home loans.
Down Payment Requirements On Non-QM And Specialty Mortgage Loan Programs
Non-QM loans generally require a 10% to 30% down payment. The down payment on non-QM mortgages depends on the lender’s layered risk factor. The lower the borrower’s credit scores, the lender will view it as high risk and charge a higher mortgage rate. Credit scores are the most important factor when it comes to pricing mortgage rates. The higher the risk, the higher the down payment, and the higher the mortgage rates. Borrowers of non-QM mortgages can put a 10% down payment on a home purchase with a 720 credit score. Non-QM mortgages one day out of bankruptcy and foreclosure require a 30% down payment. Jumbo mortgages require a 20% to 30% down payment. There is no mortgage insurance required on non-QM mortgages. Non-QM mortgage rates are based on the down payment and the borrower’s credit scores. Gustan Cho Associates has a specialty traditional 90% LTV jumbo loan program with up to a 50% debt to income ratio cap. The minimum credit score for the 10% down payment traditional jumbo loan program is 660 FICO.
Can Sellers Concessions Be Used For Down Payment?
There are two types of costs involved in home purchases:
- Down Payment
- Closing Costs
The down payment requirements on home purchases are mandatory and seller concessions cannot be used for the down payment.
Amount Of Sellers Concession Allowed
Every loan program has restrictions on the amount of seller concessions allowed.
Here are the maximum amount of seller concessions allowed:
- HUD allows up to 6% of sellers concession
- VA Loans allow up to 4%
- USDA Loans allow up to 6%
- Jumbo mortgages normally allow up to a 3% seller concession but it is dependent on the individual lender
- Non-QM and specialty lenders normally allow up to a 6% seller concession but it depends on the individual lender
Fannie Mae and Freddie Mac Allow 3% sellers concession for owner-occupied and second homes and 2% for investment homes.
Here are the down payment requirement on home purchases
Every loan program has its own down payment requirements on home purchases. Government and conventional loans have their own down payment requirements mandated by the agency. Government loans are for primary owner-occupant mortgages only. You cannot finance second homes and/or investment properties with FHA, VA, USDA loans. Conventional loans allow second home and investment property financing and have separate down payment requirements. Jumbo, Non-QM, and specialty mortgages are portfolio loans. Portfolio loans are not insured by any government agency and are not sold to Fannie Mae and/or Freddie Mac. Portfolio loans are either held by the investor funding the loan or sold to financial institutions such as hedge funds, insurance companies, or other large financial institutions. Non-QM and alternative mortgage loan programs’ down payment requirements depend on the individual investor. The down payment requirements on jumbo loans depends on the individual investor. Every portfolio lender can have its own mortgage lending requirements and guidelines.
The following is a list of general down payment requirements per the mortgage loan program:
- HUD requires a 3.5% down payment on home purchases on FHA Loans
- Borrowers with credit scores down to a 500 FICO are eligible for an FHA loan
- HUD requires borrowers with under a 580 credit score and down to a 500 FICO to put a 10% down payment versus the 3.5% down payment
- Fannie Mae and Freddie Mac require 3% to 5% down payment on Conventional Loans
- 3% down payment on conventional loans apply to first-time homebuyers
- A first time homebuyers is a buyer who was not a homeowner in the past three years
- If you owned a home in the past three years, you need to put a 5% down payment on a convetnional loan
- USDA and VA does not have any down payment requirements on home purchases
- Jumbo mortgage down payment requirements vary from 10% to 30%
- Investment homes require a 20% to 30% down payment
- Non-QM Loans require a 10% to 30% down payment
- Down payment on bank statement loans require a 20% down payment
- Condotel loans require 25% down
- Non-Warrantable Condos require 20% down
- Fix and Flip Loans require 15% down and 10% down on rehab amount
Down Payment Requirements From Gift Funds
All mortgage agencies and lenders allow gift funds to be used as a down payment and closing costs on home purchases. However, gift funds are not viewed favorably by lenders, and the Automated Underwriting System. Gift funds can be from family members and/or relatives of borrowers and employers. Gift funds can be used only for the down payment and closing costs on a home purchase. Reserve funds cannot be gifted funds. Reserves are one month of principal, interest, taxes, insurance PITI. So if a lender asks for six months of reserves, it means the lender wants to see six months of PITI of the borrower’s own funds. Reserves does not always need to be in cash. Reserves are not tied up. You can use the reserves in any way or form after you close on your home. Stocks, bonds, and other liquid documented assets and securities can be used as reserves. Reserve requirements is common for borrowers with less than perfect credit or higher risk borrowers with non-QM and jumbo loans. No-doc home loans require a 20% down payment and the reserves depend on the borrower’s credit scores. Borrowers with a 720 credit score only require six months of reserves. For mortgage borrowers with a 640 credit score, no-doc mortgages require an 18 month in reserves.
For homebuyers who are dependent on gift funds, here is how gift funds on home purchases work:
- 100% of gift funds can be used for the down payment and/or closing costs on home purchases
- The donor of gift funds needs to sign a gift letter provided by the lender
- Gift Letter needs to state funds provided to the borrower is solely a gift
- The gift is not a loan and that it will not be paid back
- The donor of gift funds needs to provide 30 days bank statement reflecting that the gifted funds are seasoned for at least 30 days
- The borrower needs to provide a copy of the check of gift and bank deposit slip
- Updated bank statement after the deposit of gift funds needs to be provided to the lender
Down Payment Requirements From Other Sources
Homebuyers can use their 401k and/or retirement account for their down payment on a home purchase. Homebuyers can borrow up to 60% of their 401k value and use that towards their home purchase. The amount they borrowed from their 401k and/or retirement account will not count towards their debt to income ratios because they are borrowing funds that belong to them.
If you have any questions, please contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Borrowers can email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. We are a mortgage company licensed in multiple states with no lender overlays on FHA, VA, USDA, and conventional loans. GCA Mortgage have lending partnerships with wholesale non-QM investors and can offer dozens of alternative and special loan programs such as no-doc loans, 12-month bank statement loans for self-employed borrowers with no income tax required, asset-depletion, P and L stated income loans, No Income No Asset Loans, cash-flow rental income mortgages, and dozens of other loan programs for primary owner-occupant loans, second homes, and investment properties.