Minimum Down Payment For a Home Purchase Requirements

What is the Minimum Down Payment For a Home Purchase

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers the minimum down payment for a home purchase. One of the major hurdles for homebuyers is the minimum down payment for a 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 than inventory. Homebuilders have set historic sales records quarterly for the past eight years.

Due to rising home prices, HUD and the Federal Housing Finance Agency (FHFA) have increased FHA and conformed

loan limits annually for the past eight years. 2024 FHA Loan Limits is now capped at $498,257. 2024 Conforming Loan Limits is now capped at $766.550.  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 are now under 3.0%. Economists and analysts expect mortgage rates to remain at these levels for years. The refinance boom has just started.

Demand For Homes Remain Strong Despite Skyrocketing High Rates

Mortgage companies are thriving and have overcapacity. 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 rush to lenders to get qualified and pre-approved to shop for a new home. One of the major concerns for homebuyers is how much money they will need to purchase a home.

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How Much Money Do I Need To Buy a Home

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A first-time home buyer needs to consider two types of funding when purchasing a home. The down payment and closing costs. We will not worry about closing costs. This is because there are ways for home buyers not to pay 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 for 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 score. This article will discuss the minimum down payment on home purchase requirements.

What Is a Down Payment on a Home Purchase

The down payment on a home purchase is different from 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 for 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 make a higher down payment if they can afford it. The mortgage loan amount the home borrower applies for is the purchase price less the down payment.

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Earnest Money on a Home Purchase

The earnest money check the home buyer gives the seller’s realtor or agent is the good faith deposit 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. If the home buyer cancels the purchase contract after the mortgage contingency period ends, 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 loans do not require any down payment from qualified borrowers. For FHA loan programs, the minimum down payment required is 3.5% with 580 credit score borrowers. If credit scores are under 580, 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 for condominiums, depending on the state. Condominium loans are deemed riskier for mortgage lenders. The lender will require private mortgage insurance for any conventional loan higher than an 80% loan-to-value ratio. With conventional loans, the lower the down payment, the higher the mortgage rate. The higher the down payment, the less of a risk factor borrowers are, which is why higher down payments yield lower mortgage rates.

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What is The Minimum Down Payment on 2-to-4 Unit Multi-Family Mortgage Loans

Any property up to four units is considered a residential property. If a home buyer plans to purchase a 2-to-4-unit property, HUD requires a minimum down payment of 3.5% on two-to-four-unit multi-family homes.

The home buyer needs to occupy one of the units. The remaining units can be rented and used for income.

Up to 85% of the potential rental income of the other units can be used towards income.  Fannie Mae guidelines on multi-family homes require a 5% down payment on owner-occupant multi-family two to four-unit homes. Conventional loans require a 5% down payment for 2- to 4-unit residential properties that are owner-occupant. Up to 75% of the potential rental income can be used towards the income calculation of the borrower’s debt-to-income ratios.

Jumbo Mortgage Loans

Any mortgage loan limits of over $766,550 are considered non-conforming since they do not conform to Fannie Mae and Freddie Mac loan limit guidelines of $766,550. It is often called a jumbo loan. The minimum down payment for jumbo mortgage loans is 20%.

Some jumbo mortgage lenders will lend up to 90% loan-to-value, thus requiring only a 10% down payment. 90% LTV Jumbo Mortgages require 720 credit scores.

Again, a 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%. Portfolio loans are 30-year mortgage loans.

Only adjustable-rate mortgage products are available on condotel and non-warrantable condo loans. 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, the mortgage rate is fixed for the first seven years. We will adjust from years 8 to 30 based on the index. The index is normally based on the Cost Maturity Treasuries (CMT). The total plus the index is the new rate. The margin is constant.

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Minimum Down Payment on Investment Property Mortgage Loans

A 20% minimum down payment is required for investment homes. Certain investment loan programs allow for potential rentals to be used. For 75% of the potential rental income to be used, the minimum down payment required on investment homes is 25%. For example, here is a case scenario: If an investment home has a potential rental income of $1,000. The borrower must use the potential income to qualify for their debt-to-income calculations.

The home buyer needs to put in a 25% down payment instead of 20% down payment to use potential rental income as qualified income.

By making a 25% down payment, 75% of the potential $1,000 or $750 can be used as part of the borrower’s income to qualify for their debt-to-income ratio. If the home buyer of the investment home only puts down a 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&L investor loan programs, bridge loans, apartment building loans, and other investment property or commercial loan programs.

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