What is a down payment?
A mortgage down payment is the amount of money a consumer pays for their share of the purchase price of a home. The payment is for a small percentage of the purchase price. Lenders will only fund a certain percentage of a home’s value to reduce their risk.
Why down payments are required for home loans
A down payment is required for most mortgage loans. Research shows that a consumer who has more invested in a home is less likely to default on their loan. Also, when a borrower puts an amount down, the lender does not have to finance the entire purchase price of the home. In the event a borrower defaults on the loan the lender will have an equity position on the property.
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Down payment requirements for each type of mortgage
- FHA Loans – 3.5%
- USDA Loans – NO Downpayment
- VA Loans – NO Downpayment
- 203k Loans – 3.5%
- HomeReady™ Loans – 3%
- Conventional Loans – 5%-20%
- Conventional 97 – 3%
- Jumbo Loans – 15%-20%
Where down payments can come from:
- Your savings account
- 401k or IRA assets
- Gift from a relative or close friend
- From a co-borrower or co-signer
Using gift funds
The entire, or a portion of the down payment funds can be a gift from a friend or family member. FHA and 203k loans allow the entire 3.5% to be a gift. Conventional loans rules on down payment gifts are a little different:
Conventional Loan rules on gift funds
- If more than 20% is put down, all the funds can be a gift
- Only a portion of funds can be a gift if the total down payment is less than 20%. Requirements for amounts will vary based on the lender and loan type.
- Investment properties are not eligible for gift funds
You will need to provide your loan officer with a gift letter for the down payment. This shows that the person gifting the funds does not expect to be repaid. You will need to include the following in the gift letter:
- Donor’s contact information and name
- Property address
- Relationship to the borrower
- Statement showing the donor is not expecting the borrower to repay them
- Amount of money being gifted
- Donor and borrowers signature
One of the benefits of making a large down payment of at least 20% is that you avoid paying mortgage insurance. PMI (private mortgage insurance) is required on all mortgages when putting less than 20% down except for VA loans. PMI is paid monthly, the mortgage insurance fee varies from loan to loan. On most mortgages the PMI can be removed once the balance on the loan reaches 78% of the appraised value.
Annual PMI fee for each mortgage loan type
- FHA < 90% LTV = 0.80%
- FHA > 90% LTV = 0.85%
- VA – No PMI
- USDA – 0.35%
- Conventional – 0.51%
First-time Home Buyer Down payment Assistance and Grants
First-time home buyers can choose from any of these great loan programs. The most popular mortgage for first time buyers are FHA Loans because they require a low downpayment. As a first-time home buyer you may qualify for grants or down payment assistance. Go to the HUD website to search for grants in your state.
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