How Much Down Payment is Required to Purchase a Home?
You will need to come up with an earnest money deposit, down payment and closing costs when you purchase a home. The earnest money is applied towards the total down payment amount. Your closing costs are in additional to your down payment. The amount of your down payment depends on the following factors:
- The type of loan you are obtaining
- The purchase price of the home
- Your credit score
- What kind of payments you can afford
- Type of property you are purchasing, i.e., single-family, townhouse, condo, 1-4 units, etc.
FHA loans only require a minimum of 3.5% down payment. VA loans do not require any down payment. Conventional mortgages require 10% -20% down payment or more. Lenders require you purchase Private Mortgage Insurance (PMI) with down payments of less than 20% on conventional Fannie Mae and Freddie Mac Mortgages to insure the lender against borrower’s defaulting on their mortgages. Once you have 20% equity in your home, the PMI is removed.
Sources of Down Payments
Down payments are the biggest challenge buyers have to meet when buying a home. There are many loan programs available today for borrowers of all income ranges.
- Savings Accounts
- Stocks and bonds
- 401(k) and IRA accounts. Some retirement plans allow the participants to use funds from their retirement plans as a down payment for a new home. If you have an IRS, there are provisions that allow first time home buyers to withdraw funds.
- Government Grants for first time home buyers (typical disqualifications including excessive income, default on a government loan, tax liens, bankruptcy discharge less than 2 years old, unpaid child support, prior foreclosure, home buyer has owned a home in the last three years).
Seller Contribution Towards Buyer’s Closing Costs
In a buyer’s market, some buyers ask the seller to pay their closing costs. However, you will need to check with your lender first before you write your offer to find out how much is allowed. It depends on the type of loan you are getting and FICO scores. Typical amounts lenders allow the seller to contribute towards the buyer’s closing costs are somewhere between 3% and 6% of the purchase price.
It is recommended that you have the title company prepare an estimated closing statement HUD-1 for you so you can see what your closing costs entail and approximately how much money you will need to bring to the closing. Your real estate agent can get this information for you.
Cash Mortgage Reserves
Before you purchase a home, you should have at least a couple month’s reserves to cover your mortgage payments already seasoned in your bank account in addition to your down payment. Lenders look at debt to income ratios when determining whether they approve your loan application. They want to make sure you have enough money to cover the monthly mortgage payments.
Your lender or mortgage broker will be able to give you detailed information on the amount of down payment required for your loan, provide you with the closing costs amounts and answer any questions you may have.