Sources For Down Payment In Home Purchase And Closing Costs

This BLOG On Sources For Down Payment On Home Purchase Was UPDATED On January 4th, 2019

Sources For Down Payment In Home Purchase

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 need to be verified and need to come from qualified funds. Closing costs are normally not an issue. In this article, we will cover and discuss Sources For Down Payment On Home Purchase.

Closing Costs On Home Purchase

Most homebuyers 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 Concessions To Cover Closing Costs On Purchase

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 are 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 allow up to 3% sellers concessions on primary owner occupant properties
  • 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

The importance of lenders in relation to the costs of closing buyers

In the event, if the home buyer cannot get a seller’s 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 the down payment and/or closing costs. Here is how gift funds work:

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

Definition Of Family Member

What does the definition of a family member mean?

The 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 grandparent or step-parent or step-grandparent
  • Brother and/or stepbrother
  • Sister and/or stepsister
  • 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 the down payment and closing costs on the home purchase.

Here is how it works:

  • Borrowers can borrower from the IRA/401K
  • The 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

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

  • The 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.

Sources For Down Payment On Home Purchase On Secondary Financing 

What must be the advance for the purchase of a house for secondary financing

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 Guidelines On Sources For Down Payment On Home Purchase

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 canceled check, evidence of wire transfer or other draw request evidencing that the Government Entity had the authorization to provide the funds is required as proof of legally 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 Sources For Down Payment On Home Purchase

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 as an asset for qualifying purposes.

Seller And Interested Party Contributions Sources For Down Payment On Home Purchase

What are the sources of the seller and interested party's contribution Sources of advance payment for buying a home

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
  • The 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/prepaid

Unacceptable Sources For Down Payment On Home Purchase

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

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 us at Gustan Cho Associates at 262-716-8151 or text us for faster response. We are available 7 days a week, evenings, weekends, and holidays. Or email us at gcho@gustancho.com.

This BLOG On Sources For Down Payment On Home Purchase Was UPDATED On January 4th, 2019

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