The Lowdown on Down Payments

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When purchasing a home, down payments can be downright daunting.  Questions immediately come to mind, such as “How much do I need to put down?” to “Where am I going to get that kind of money?”  Here is a quick rundown of the big three loan programs, their down payment requirements, and some information on where to come up with the funds.

So, the big three loan programs are VA (0% down – usually), FHA (3.5% down), and Conventional (5% down).  Keep in mind that any down payment less than 20% of the purchase price/appraised value will have mortgage insurance (MI), with the exception of VA loans.  Read about MI in more detail here.

VA – this is a great benefit to honor those who serve or have served our country in the armed forces.  VA loans allow veterans to purchase a home with little to no money down with flexibility on credit scores.  It does, however, require a VA funding fee of 2.15% of the loan amount, which can be financed into the loan balance.  Exemptions from this fee apply for those who are disabled due to service-related medical issues.  Mortgage insurance is not required for VA loans regardless of the home’s loan-to-value (LTV).

FHA – 3.5% of the purchase price is the minimum down payment required.  This is a great program for those with less than perfect to average credit and/or limited funds for down payments.  Although FHA rates tend to be lower than Conventional rates, beware of the UPFRONT mortgage insurance premium (UFMIP), which is not required on Conventional loans, in addition to monthly mortgage insurance.

Conventional – 5% of the purchase price is the minimum down payment required.  Conventional loans are recommended for those with good to excellent credit as rate pricing improves with better credit scores.

CalHFA offers several programs that can assist low to moderate income buyers with down payment and/or closing cost assistance.  This is in the form of a second or third loan which are subordinate to the first trust deed loan.  These junior loans are offered at competitively low rates that are calculated using simple interest, which will save even more money in the long run.

So where can borrowers who do not meet low to moderate income requirements get this kind of money if they really want to purchase a home?  In addition to coming from savings or checking accounts, down payments can come from other sources such as retirement accounts and gifted money.

Some retirement accounts allow for the account holder to withdraw funds if they are intended for the purchase of a primary residence.  Taxes and penalties may apply, so be sure to discuss those with your retirement account administrator and tax professional prior to initiating a withdrawal.

In the case of gifted money, the lender will require a gift letter to be signed by the person gifting the money.  In essence, the letter must state the exact dollar amount being gifted and that the gift is not a loan and that no repayment is required; the subject property address; the donor’s name, address and phone number; the donor’s relationship to the borrower; and the donor’s signature.

Keep in mind, any funds that have not been in the borrower’s account for the past two months must be sourced, so in the case of retirement account withdrawals and/or gift money, additional documentation is required indicating where the funds came from and where the funds were deposited to.

Financing a home can seem like an insurmountable task, especially for first time buyers.  There’s a whirlwind of information out there enough to make anyone’s head spin.  That’s where I can help you navigate the overwhelming stream of data to find the best programs possible for your situation.  Contact me today for a free consultation and/or pre-approval before you start shopping for a home.

© 2017 Marilyn Quindo

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