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What Is The Required Minimum Down Payment On Home Purchase

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This BLOG On What Is The Required Minimum Down Payment On Home Purchase Was UPDATED On March 31st, 2018

There are two types of funding a first time home buyer needs to consider when purchasing a home.

  • The down payment and closing costs
  • We will not worry about closing costs
  • This because there are ways of home buyers not paying closing costs
  • Closing costs are paid by either getting a sellers concessions by the seller towards the buyer’s closing costs or by getting a lender’s credit towards the borrower’s closing costs
  • Lenders can offer lender credit to borrowers closing costs in lieu of higher mortgage rates
  • How much down payment is required for a home purchase? 
  • The minimum down payment required depends on the mortgage loan program
  • It could also depend on the borrower’s credit scores as well

What Is A Down Payment?

The down payment on a home purchase is different than the earnest money

Earnest money is a deposit given on a home purchase. Earnest money is part of the down payment and is offset by the minimum down payment required:

  • The minimum down payment on a home purchase is the percentage of the purchase price of the subject property that lenders require
  • The mortgage lender has a minimum down payment requirement
  • Borrowers can select to put a higher down payment if they can afford to do so
  • The mortgage loan amount the home borrower applies for is the purchase less the down payment

Earnest Money

The earnest money check the home buyer gives the seller’s realtor or seller’s agent is the good faith deposit that is paid to secure the real estate purchase contract.

  • The earnest money is counted towards the down payment
  • For example, here is a case scenario
    • lender requires a down payment of 5% on a $200,000 purchase contract
    • home buyer gives an earnest money check for $5,000.00
    • the required down payment is $10,000.00 less the $5,000.00 earnest money check
  • The mortgage loan borrower needs to come up with $5,000.00 for the down payment at closing
  • In the event if the home buyer cancels the purchase contract after the mortgage contingency period is over, he or she can lose the earnest money

Minimum Down Payment Requirements

The minimum down payment required depends on the type of mortgage loan program the home buyer chooses.

  • For example, VA loan and USDA loan programs offer 100% financing
  • VA and USDA Home Loans do not require any down payment form qualified borrowers
  • For FHA loan programs, the minimum down payment required is 3.5% down payment with 580 credit score borrowers
  • If credit scores are under 580, then FHA requires a 10% down payment
  • Minimum down payment for conventional loan programs is 5% down payment for single family homes and town homes
  • 3% down payment on conventional loans for first time home buyers
  • However, down payment requirements can be higher on condominiums depending on the state
  • Condominium loans are deemed riskier for mortgage lenders
  • Any conventional loan that is higher than a 80% loan to value, private mortgage insurance will be required by the mortgage lender
  • With conventional loans, the lower the down payment is the higher mortgage rate will be. 
  • The more down payment down, the less of a risk factor borrowers are and that is why higher down payment yields lower mortgage rates

2 To 4 Unit Mortgage Loans

  • Any properties up to 4 units is considered a residential property
  • If a home buyer is planning on purchasing a 2 to 4 unit property, FHA requires a minimum down payment of 3.5% down payment
  • Home buyer needs to occupy one of the units
  • The remaining units can be rented and be used towards income
  • Up to 85% of the potential rental income of the other units can be used towards income
  • For conventional loans, 15% down payment is required for 2 to 4 unit residential properties
  • Up to 75% of the potential rental income can be used towards income calculation of the borrower’s debt to income ratios

Jumbo Mortgage Loans

Any mortgage loan limits of over $453,100 is considered non-conforming loans since they do not conform to Fannie Mae and Freddie Mac loan limit guidelines of $453,100. It is often referred to as jumbo loans:

  • Minimum down payment for jumbo mortgage loans is 20% down
  • There are jumbo mortgage lenders that will lend up to 90% loan to value, thus requiring only a 10% down payment
  • 90% LTV Jumbo Mortgages require 720 credit scores
  • Again, lower down payment mean higher mortgage rates because the mortgage lender has more risk

Condotel Financing And Non-Warrantable Loans

Condotel mortgage loans and non-warrantable condominium loans are portfolio loans and require a 25% minimum down payment.

  • Portfolio loans are 30 year mortgage loans
  • Only adjustable rate mortgage products are available
  • There are 3/1 ARM, 5/1 ARM, and 7/1 ARM mortgage loan programs
  • For example, on a 7/1 ARM with a starter interest rate
    • mortgage rate is fixed for the first 7 years
    • will adjust from years 8 to 30 based on the index
    • margin plus the index is the new rate
  • The margin is constant

Investment Property Mortgage Loans

20% minimum down payment is required for investment homes:

  • For 75% of the potential rental income to be used, the minimum down payment required on investment homes is 25% down
  • For example, here is case scenario:
    • if an investment home has a potential rental income of $1,000
    • borrower needs to use the potential income to qualify for their debt to income calculations
    • home buyer needs to put 25% down payment instead of 20% down payment to be able to use potential rental income as qualified income
  • By putting 25% down payment, 75% of the potential $1,000 or $750 can be used as part of the borrower’s income in qualifying for their debt to income ratio
  • If the home buyer of the investment home only puts down 20% down payment, the potential rental income cannot be used

Gustan Cho

www.gustancho.com

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