Down Payment And Closing Costs: Home Purchase

Down Payment And Closing Costs

Gustan Cho Associates

Many first time home buyers are very eager to purchase a home and become first time homeowners but many are concerned with the down payment and closing costs for their home purchase.  Many first time home buyers believe that they need thousands saved in order to become a homeowner.  However, that is not the case.  True, you need a down payment for a home purchase unless you are eligible for a VA Loan or a USDA Loan.  Down payment requirement for a FHA Loan is only 3.5% of the home purchase price and many times, you do not need the full down payment because you may get tax proration credits depending on the county and state you are purchasing your home and you can offset your down payment with the tax proration credits.  We will explain tax  proration credits in a later paragraph on this blog article.

All home purchase transactions and refinance mortgage transactions have closing costs associated with it.  If you are a home buyer and can barely come up with the down payment and cannot afford to pay any closing costs, no worries.  Most home buyers do not have to worry about paying for closing costs.  If you are represented by a professional real estate agent, the real estate agent will get you a sellers concession towards the home buyers closing costs where the seller pays for the closing costs for the home buyer.

How Does Sellers Concessions Towards Paying Home Buyers Closing Costs Work?

All mortgage loan programs have maximum sellers concession allowance towards paying for a home buyers closing costs.  FHA allows up to 6% for a seller to contribute a home buyer’s closing costs.  VA Loan programs will allow up to 4% sellers concession towards a home buyers closing costs.  Conventional loans on primary and second homes will allow up to 3% in sellers concessions towards a home buyers closing costs and 2% sellers concession for investment property mortgage loans.  USDA will allow up to 6% in sellers concession towards a home buyers closing costs.

A sellers concession cannot be wasted.  Excess in sellers concession goes back to the home seller and cannot be given as a cash credit to the home seller.  It is always wise to make sure that you do not request more of a sellers concession than the maximum you need.  Your mortgage loan originator will advise you on how much your estimated closing costs will be.

What If Home Seller Will Not Give Sellers Concession?

Never assume that by asking for a sellers concession will show a sign of weakness.  I run into this situation every day where realtors will not get for a sellers concession because the seller is a lender ( short sales, foreclosures,REOs) or because there are multiple purchase offers.  Even the wealthiest home buyers ask for sellers concessions towards a home buyers closing costs.  Some home sellers are not comfortable in giving a home buyer a sellers concession in the event if the property does not appraise out.  In the event if the property comes in at a lower value than the original purchase offer, then everything needs to go back on the drawing board anyways and the sellers concession can then be eliminated at that time.  A sellers concession contingency can be added to the home purchase contract that the sellers concession is only valid if the appraisal comes in at the purchase offer value.

In the event if the home seller does not agree to give a sellers concession to the home buyer and the home buyer has only the down payment but not the closing costs, the home buyer can request a lender’s credit towards a home buyers closing costs.  How this works is that the mortgage lender can cover most or all of the home buyers closing costs in lieu of a slightly higher mortgage rate.

What If I Don’t Have Down Payment For Home Purchase? Gift Funds

If you are a home buyer, you will need to document the down payment.  If you deposit a large chunk of cash money in your bank account, that money cannot be used towards the down payment.  The mortgage lender will want to see that your down payment has been sourced and/or seasoned in your bank account for at least 60 days.  When you apply for a mortgage loan application, one of the most important items that the mortgage loan underwriter will ask you is 60 days of bank statements.  The mortgage loan underwriter will want to see your down payment in your bank account balance.  As an example, if you are purchasing a $100,000 home via a FHA loan, you will need 3.5% of the purchase price, or $3,500,  to show for the down payment.  Your mortgage loan underwriter will be looking for that.  If you do not have the $3,500 balance in your bank account, the mortgage loan underwriter will want to know where the down payment will be coming from.  If you have mattress money, cash, in your safe and you tell them that your will be using cash or you deposit that cash in your bank account, that will not fly.  Those funds are not seasoned and are not sourced so even though you actually do have the $3,500 down payment needed, you cannot use that nor will the underwriter count that as verified funds.  If you have cash money, you need to deposit it in your bank account and let it season for 2 months in order for it to be considered verified funds.

If you do not have the down payment for your home purchase or the down payment cannot be verified due to not being able to source it, then you can get gift funds from a family member and/or relative.  FHA allows 100% gift funds from family members and/or relatives to be used as down payment towards a home purchase.

Gift Funds For Down Payment And Closing Costs

A family member or relative can give a home buyer gift funds, up to 100%, to be used towards a home purchase.  However, gift funds cannot be a loan and there is a letter that the donor needs to sign certifying that the gift funds is not a loan and that the gift funds will not be paid back.  When the donor is gifting the money, the donor of the gift funds needs to sign a gift letter, which is provided by the mortgage lender, as well as 30 days of the donor’s bank statement showing that the funds were seasoned in the donor’s bank account for at least 30 days.  The gift funds leaving the donor’s account and a deposit slip being deposited into the recipient’s account needs to be provided.

Other Sources That Can Be Used Towards Down Payment And Closing Costs

In addition to bank accounts such as checking accounts and/or checking accounts, home buyers can use other assets to source down payment and/or closing costs.  Certificate of Deposits can be used to verify down payment funds as well as invetment accounts such a stocks, bonds, and treasuries.  Retirement accounts can be used as well as long as it can be liquid such as being able to borrow against it.  Investment accounts such as IRA accounts and 401k accounts can also be counted towards reserve requirements.  Some mortgage lenders may require a home buyer to have 3 to 6 months of reserves ( One month of reserves is equivalent to one month’s of housing payment; principal, interest, taxes, and insurance, and homeowners association fees if applicable).  Reserves are common requests for home buyer with low credit scores, high debt to income ratios, or manually underwritten mortgage loan applications.

 Sale Of High Ticket Item To Be Used Towards Home Purchase Down Payment

You can use a sale of a high ticket item towards the down payment of a home.  For example, if you are selling a sports car for $10,000 and you need that money for the down payment, you can use that $10,000 towards the down payment for your home purchase, however, it needs to be sourced and verified.  The copy of a bill of sale is required as well as the copy of the check and the check being deposited to the home buyer’s bank account along with the deposit slip.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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