Buying a house requires a down payment when using mortgage loan financing. Down payments vary from loan program to loan program. The down payment is your equity in the transaction because lenders lend against purchase price or appraised value whichever is lower.
For example if you’re buying a house for $300,000 and you are putting down 5% that’s $15,000 which is the difference between the down payment and your financed loan amount in this case loan being $285,000. You’re putting 5% down thereby taking out a loan at a loan to value of 95%. Throughout your home buying process, you’ll probably hear the word “LTV” which is the acronym for loan-to-value.
How much down payment do I need to buy a house?
You don’t need 20% down. Let’s say that again you do not need 20% down for buying a house. The least amount you can put down for purchasing a house today is zero. That’s right 100% financing is available on a USDA rural home loan. Provided that you can qualify for financing, you can actually get a truly 100% financing fixed rate mortgage to purchase a primary residence.
Eligible First time home buyers and move up buyers can take advantage of these flexible programs.
USDA Loans-the minimum down payment required 0%.
FHA Loans-the minimum down payment is 3.5%.
Home path Loans-the minimum down payment is 3%.
Conventional Loans-the minimum down payment is 5%.
The down payment does not even have to be your own money. The funds can belong to a friend or even a family member. Friends and family are permitted to contribute gift funds to your purchase transaction so long as there is a paper trail. The paper trail will involve a gift letter signed by the giftor (person giving the money) as well as the giftee (person receiving the money). The gift letter will have to state the relationship to the parties as well as be executed (signed by both parties). The person giving the gift will also have to provide a
bank statement or an asset account statement showing they have the ability to get that money for the person buying the home. In other words the money has to be sourced. Money that is sitting at home in a safe is are considered ineligible funds.
So what happens if the down payment money or the gift money is sitting at home in a safe, aka “mattress money”?
Mortgage lenders have what’s called a seasoning requirement which basically states any money that is being used for the mortgage has to be verified by two months of bank statements. A solution is to deposit the mattress money into a bank account and leave it alone for two months. After two months, the money becomes “seasoned” and the funds are eligible for a contribution to the transaction. The giftor’s bank statement must show the money being in his or her account for at least 30 days.
Here’s a list of the types of funds that can be used for a down payment:
- bank accounts including checking accounts, savings accounts, and CDs
- money market accounts
- brokerage accounts
- whole life insurance
- retirement account
- pension plan account
- lottery winnings
- awarded monies
- proceeds from equity on another real estate transaction
- sale of a good
- any bank account or asset account that has a two month seasoning of down payment funds
*Note if the down payment is coming from an account such as a 401(k) account the lender is going to wire the terms of repayment. If the down payment is coming from the sale of a good, lender required bill of sale as well as a letter of explanation.
Buying a house requires careful consideration of all of your different choices of down payment amounts and sources. By figuring out how much money you have to work with is a down payment, you ensure you’ll be working within a budget that’s financially within your means.