This BLOG On Minimum Down Payment On Home Purchase Was Written By Gustan Cho NMLS 873293

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 because there are ways of home buyers not paying closing costs 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 by selecting a slightly higher rate.  How much down payment is required for a home purchase?  The minimum down payment required depends on the mortgage loan program a home buyer selects and 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 that is normally given on a home purchase.  The minimum down payment on a home purchase is the percentage of the purchase price of the subject property that a mortgage lender will require.  The mortgage lender has a minimum down payment requirement and the borrower 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 normally counted towards the down payment.  For example, if the mortgage lender requires a down payment of 5% on a $200,000 purchase contract and the home buyer gave 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 and do not require any down payment form qualified mortgage loan borrowers.  
  • For FHA loan programs, the minimum down payment required is 3.5% down payment if you have a 580 FICO credit score or higher. 
  • If your credit scores are under 580 FICO, 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. 
  • 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 your down payment is the higher your mortgage rate will be. 
  • The more down payment you put down, the less of a risk factor the mortgage loan borrower is and that is why higher down payment mortgage loans have lower mortgage rates.

2 To 4 Unit Mortgage Loans

  • Any properties up to 4 units is considered a residential property and residential mortgage loan guidelines apply. 
  • 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 and the home buyer needs to occupy one of the units. 
  • The remaining units can 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 and 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 over $417,000 is considered a jumbo loan.  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.  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 but 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 rate of 5.75%, the rate is fixed for the first 7 years and will adjust from years 8 to 30 based on the index.  The margin is constant.

Investment Property Mortgage Loans

20% minimum down payment is required for investment homes if the rental income do not be used.

  • For 75% of the potential rental income to be used, the minimum down payment required on investment homes is 25% down. 
  • For example, if an investment home has a potential rental income of $1,000 and the borrower needs to use the potential income to qualify for their debt to income calculations, then the home buyer needs to put 25% down payment instead of 20% down payment. 
  • 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

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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