Most types of mortgage require a down payment because lenders do not like to fund 100% od the purchase price.
A down payment shows you have the financial wherewithal to afford a mortgage.
Mortgage loans no longer require large 20% down payments, there are many programs available with a down payment of less than 5%.
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Can I use a Personal Loan for a Down Payment?
Lenders do not allow borrowers to use a loan for the down payment on a mortgage. Lenders will check your credit and inquiries to ensure you haven’t gotten any loans that are not yet appearing on your credit history.
Any loans you do have are factored into your debt-to-income ratio (DTI ratio) which needs to be no higher than 41%.
A piggyback loan is a mortgage loan where a separate loan is used for a portion of the down payment. The most common piggyback loan is a 80-10-10, where the mortgage is for 80% of the loan-to-value ratio, a separate loan of 10% LTV, and a down payment of 10% of the purchase price is used.
The loan for 10% is a separate loan from the mortgage and you will have two separate payments. This type of loan is typically only for larger loan amounts, such as jumbo loans.
Other Ways to Come up with Your Down Payment
While you can’t use a loan for a down payment on a house, here are some other ways you can come up with your down payment.
Some mortgages, like FHA loans, allow for the down payment to be a gift from a friend or family member.
100 percent of the 3.5% down payment required for FHA loans may be gifted. If you are having your down payment gifted to you, you’ll need a gift letter stating its a gift that does not need to be paid back.
401(k) or IRA
Lenders do allow you to access the funds in your 401k or IRA accounts to come up with your down payment. However, the Government charges a 10% penalty tax for withdrawing from retirement accounts before the age of 60.
If you’re borrowing money from one of your investment accounts you will have to repay what you borrow. These payments are factored into your debt-to-income ratio and can affect how much of a home you’re approved for.
Down Payment Assistance Programs
There are many down payment assistance programs and grants out there, especially for first-time homebuyers. You can check your local county, or city Government website for available programs.
Grants and down payment assistance programs are free money that does not need to be repaid. There are also state-wide programs you can find on the HUD website.
Credit Card Cash Advance
While borrowing money using your credit card is not recommended, this method will work. However, you will be stuck with a high interest rate and the monthly payment will be included in your debt-to-income ratio.
Using a cash advance on a credit card is only a good idea if you have a large sum of money coming in a few months, otherwise it is best to save up for your down payment.
Low and No Down Payment Programs
Just because you don’t have 20% to put down on a house doesn’t mean you can’t get a mortgage. Gone are the days of needing such a large down payment to be able to buy a house.
The Government came along in 1934 and started the Federal Housing Administration to help more American’s become homeowners by insuring mortgages to reduce the risk to the lender.
FHA loans are one of the more popular mortgage types used today. They are great for first-time home buyers because of their low credit score and down payment requirements. Some lenders offer these loans to borrowers with a 580 credit score with just a 3.5% down payment.
The down payment for an FHA mortgage can come from gift funds or through the use of a down payment assistance program or grant. The 3.5% down payment is one of the lowest for any type of mortgage loan.
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VA loans are one of the greatest benefits offered to our Nations’ Veterans. If you qualify for a VA loan then no down payment is required. That’s right, Veterans can receive 100% financing on their mortgage through the VA.
Mortgage insurance is required on all mortgages with a down payment of less than 20%. However, VA loans do not have a mortgage insurance premium, this can add up to thousands of dollars in savings per year. If you think you may qualify go to the VA website to get a certificate of eligibility.
The U.S. Department of Agriculture created USDA rural development home loans to help farmers save money on their mortgage and to encourage home ownership in rural areas of the country. Not only do USDA loans offer 100% financing for homebuyers, they also have the lowest mortgage insurance rate of any mortgage at just 0.35% of the loan amount.
203k Renovation Loans
FHA 203k loans are a type of home improvement loan that allow you to purchase a home in need of repairs plus get extra cash to renovate the home. 203k loans are a type of FHA loan, they have the same qualifying requirements as FHA loans and the same low 3.5% down payment.
Conventional 97 Loans
Fannie Mae wanted to compete with the FHA for first-time home buyers. The conventional 97 mortgage requires just a 3% down payment, which is even less than an FHA loan. And like FHA loans, you can use gift funds from a relative or friend. Like all conventional loans the requirements are higher than Government loans, mortgage lenders typically require a 620 or higher FICO score.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.