Minimum Down Payment On Home Purchase Requirements

Minimum Down Payment On Home Purchase Requirements

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Minimum Down Payment On Home Purchase Requirements

One of the major hurdles for homebuyers is coming up with the minimum down payment on home purchase.

  • The U.S. economy is booming
  • The housing market is stronger than it has ever been
  • Despite the coronavirus outbreak and high unemployment, the housing market is booming
  • There is more demand for homes versus inventory
  • Homebuilders are setting historic sales record quarter after quarter for the past five years
  • Both HUD and the Federal Housing Finance Agency (FHFA) has been increasing FHA and Conforming Loan Limits year after year for the past four years due to rising home prices
  • 2020 FHA Loan Limits is now capped at $331,760
  • 2020 Conforming Loan Limits is now capped at $510,400
  • Adding fuel to the hot housing market is the historic low rates
  • After the Federal Reserve Board dropped interest rates to zero percent, mortgage rates tumbled to historic lows
  • 30-year fixed-rate mortgages is now under 3.0%
  • Economists and analysts expect mortgage rates to remain at these levels for years to come
  • The refinance boom has just started
  • Mortgage companies are thriving and at over capacity
  • It takes an average of 120 days to refinance a home mortgage today
  • The turnaround times are not expected to shorten anytime soon
  • Renters and first time homebuyers are rushing to lenders to get qualified and pre-approved so they can start shopping for a new home

One of the major concerns for homebuyers is how much money will they need to purchase a home.

How Much Money Do I Need To Buy A Home

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 seller’s 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

In this article, we will cover and discuss the minimum down payment on home purchase requirements.

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:

  • the lender requires a down payment of 5% on a $200,000 purchase contract
  • the 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 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 townhomes
  • 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 an 80% loan to value, private mortgage insurance will be required by the 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 are 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
  • The 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 $510,400 are considered non-conforming loans since they do not conform to Fannie Mae and Freddie Mac loan limit guidelines of $510,400. 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 means higher mortgage rates because the mortgage lender has more risk. Gustan Cho Associates has Non-QM Jumbo Loans with credit scores down to 620 FICO. However, the lower the credit scores, the higher the down payment requirement.

Minimum Down Payment On Condotel Financing And Non-Warrantable Loans

Condotel mortgage loans require a 25% down payment. Non-warrantable condominium loans are portfolio loans and require a minimum down payment of 20%.

For example, on a 7/1 ARM with a starter interest rate:

  • the mortgage rate is fixed for the first 7 years
  • will adjust from years 8 to 30 based on the index
  • the index is normally based on the Cost Maturity Treasuries (CMT)
  • margin plus the index is the new rate
  • The margin is constant

Minimum Down Payment On Investment Property Mortgage Loans

20% minimum down payment is required for investment homes:

  • Certain investment loan programs allow for potential rental to 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, here is a case scenario:

  • if an investment home has a potential rental income of $1,000
  • the borrower needs to use the potential income to qualify for their debt to income calculations
  • the 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 Associates offers multiple investment property loan programs. We have fix and flip financing for real estate investments, asset-depletion, P and L investor loan programs, bridge loans, apartment building loans, and other investment property and/or commercial loan programs.

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