Sources For Down Payment On Home Purchase

This BLOG On Sources For Down Payment On Home Purchase Was UPDATED On October 11th, 2017

Large deposits as sources for down payment on home purchase

The two things needed on a home purchase are the following:

  1. Down Payment
  2. Closing Costs

Both the Sources For Down Payment On Home Purchase and closing costs needs to be verified and needs to come from qualified funds. Closing costs is normally not an issue.

Closing Costs On Home Purchase

Most home buyers do not have to worry about closing costs when they are purchasing a home. Closing costs can be covered in two ways if the borrowers do not have money for closing costs:

  1. Sellers concessions
  2. Lender Credit

Sellers are allowed to give sellers concessions towards home buyers closing costs. The amount of sellers concessions depends on the loan program.

The following sellers concessions is permitted:

  • FHA allows up to 6% sellers concessions
  • USDA permits up to 6% sellers concessions
  • VA Loans allows up to 4% sellers concessions
  • Fannie Mae and Freddie Mac allows up to 3% sellers concessions on primary owner occupant properties and 2% on investment homes
  • Non-QM Loans allows up to 6% sellers concessions
  • Jumbo Lenders allow up to 3% in sellers concessions

Lender Credit Towards Buyers Closing Costs

In the event if the home buyer cannot get a sellers concession or may be short of closing costs, the lender can give the borrower a lenders credit towards closing costs. The lender credit is given in lieu of a slightly higher interest rate.

All Funds Needs To Be Verified

All funds that will be used for the down payment and/or closing costs on home purchase needs to be verified funds by the underwriter.

If there is a large increase in the borrower’s account or if the account was recently opened, the borrower must provide a credible explanation and documentation to source large deposits for all transactions. A large deposit is considered the lesser of:
  •  Deposit that resulted in an increase greater than 25% of the borrower’s gross monthly income; or
  • A deposit that is more than 2% of the sales price.

Loan From Member Of Borrowers Family For Down Payment

Gift Funds are allowed on mortgage transactions. FHA allows 100% gifted funds by a family member for a home buyer to use it for down payment and/or closing costs. Here is how gift funds works:

  • Gift funds are not viewed favorably
  • Gift funds needs to be by a family member

Definition Of Family Member

Family member is anyone who is related to the borrower by law, marriage, or blood.

Here is how Family Member is defined:

  • Child
  • Parent 
  • Grandparent
  • Foster parent and/or grand parent or step parent or step grand parent
  • Brother and/or step brother
  • Sister and/or step sister
  • Adopted children
  • Aunt and/or Uncle

Retirement Accounts To Be Used As Sources For Down Payment

Retirement Accounts can be used as verified funds for down payment and closing costs on home purchase.

Here is how it works:

  • Borrowers can borrower from the IRA/401K
  • Monthly payment on borrowed amount is not included as debt and not calculated in DTI Calculations
  • Up to 60% of assets of IRA, Thrift Saving Plans, 401k, and Keogh Accounts may be included in the underwriting analysis and sourced as verified funds

Sale Of Personal Property For Down Payment

Borrower may sell personal property such as cars, recreational vehicles, stamp or coin collections, or baseball collections subject to the following: 

  • Borrower must provide a satisfactory estimate of the value of the items and evidence that the items were sold.
  • The value estimate may be in the form of:
  • Published value estimates issued by organizations such as automobile dealers or associations related to the asset type, or
  • A separate written appraisal by a qualified appraiser with no financial interest in the transaction. 
The lower of the estimated value or the actual sales price may be used as assets to close.

Secondary Financing For Down Payment

Secondary financing is permitted to finance closing costs and down payment provided: 

  • The borrower is qualified with the debt as a long term obligation.
  • The lien is secured by the subject property and subordinate to the first lien.
  • Down Payment Assistance Programs (DAP) are permitted. Loans with credit score <620 are restricted to a maximum 45% DTI Ratio.

Government Entity

Federal, state, local government, and nonprofit agencies considered instrumentalities of government are allowable sources for providing funds to cover the borrower’s minimum down payment.

  • An FHA approved mortgagee or FHA approved non-profit on behalf of the Government Entity may also provide the funds, as long as the subordinate lien is held by the Government Entity prior to submission of the file for FHA endorsement.
  • Documented evidence that the Government Entity providing the required down payment is a HUD allowable source must be provided, as follows: 
  • If funds are provided prior to or at closing: a gift letter and cancelled check, evidence of wire transfer or other draw request evidencing that the Government Entity had authorization to provide the funds is required as proof of legal enforceable liability or obligation.
  • If funds are provided before closing: verification of fund transfer is not required if a gift letter and documentation of a legally enforceable liability or obligation is provided.

Secured Loans For Down Payment

Proceeds from a loan secured by financial assets such as stocks, bonds, Certificates of Deposits, or real property may be used for the total required investment. The assets securing the loan may not also be used an asset for qualifying purposes.

Seller And Interested Party Contributions

Contributions by an interested party may not exceed 6% of the properties established reasonable value.

Seller concessions include, but are not limited to the following: 

  • Prepayment of the buyer’s property taxes and insurance
  • Gifts such as a television set or microwave oven.
  • Payment of extra points to provide permanent interest rate buydowns.
  • Provision of escrowed funds to provide temporary interest rate buydowns.
  • Payoff of credit balances or judgments on behalf of the buyer.

Seller concessions do not include payment of the buyer’s closing costs or payment of points as appropriate to the market.

  • Funds derived from Premium Pricing are not included in interested party contributions unless the credit exceeds the actual closing costs/prepaids

Unacceptable Sources For Down Payment

  • Unsecured loans.
  • Cash advances on credit cards.
  • Borrowing against household goods and furniture.
  • Other unsecured financing.

Qualifying For Home Loan With Direct Lender With No Lender Overlays

Borrowers who need a direct lender with no lender overlays on government and conventional loans and need to get qualified for a mortgage please contact The Gustan Cho Team at USA Mortgage at 1-800-900-8569 or text us at 262-716-8151 for faster response. We are available 7 days a week, evenings, weekends, and holidays. Or email us at gcho@usa-mortgage.com.

Gustan Cho NMLS ID # 873293

Related> Minimum Down Payment For Home Purchase

Related> How Gift Funds Can Be Used For Down Payment

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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