Considering all of the home loan programs available to borrowers these days and the ever-changing guidelines that exist in today’s mortgage industry, it’s not hard to see why down payment requirements can be difficult to understand from one program to the next. In today’s article we will try to shed some light on this subject by covering the basic down payment requirements of conventional loans and the main government loan programs (i.e. FHA, USDA, and VA, respectively).
The minimum down payment required for all forms of conventional financing is 3%. The funds utilized for the down payment can come in the form of a gift provided that it’s from a qualified donor (i.e. a father, mother, sister, brother-in-law, etc.). In connection with this certain documentation requirements and the type of conventional financing also play a key role on what will be asked with regards to the source(s) of your down payment. For instance, if you qualify for “HomeReady” (a newer conventional loan program which we described in a recent blog entry) the allowable down payment sources are a bit more lenient than what is allowed with the “standard” form of conventional financing.
To expand a little further on possible down payment options with conventional financing—let’s say you decide to sell an asset (such as a vehicle) in order to come up with the necessary down payment funds. This is generally acceptable provided that you can document that you are the owner of the vehicle (i.e. your name is on the title), that the individual who purchased it paid a fair price (i.e. at or below NADA or Kelley Blue Book) and that you have a properly executed Bill of Sale. On the other hand if you plan on using your latest gambling winnings that have been stashed in cash under your mattress for your down payment or perhaps want to use a cash advance on a credit card as your down payment, neither of these sources would be considered acceptable.
The FHA loan program requires a minimum down payment of 3.5%. In addition to the slightly higher minimum down payment required, the guidelines regarding the source(s) of the down payment and what must be documented are comparatively stricter with FHA loans. If you have all of your down payment funds sitting in your checking or savings account things are pretty straightforward; however, if you intend to utilize gift funds, the documentation requirements become much more cumbersome. More specifically, in addition to providing documentation evidencing that the gift is from a qualified donor, the donor has to provide documentation proving that they have the funds to give (via a checking or savings account statement for example) and sign a gift letter. Then, both the withdrawal of the gift funds from the donor’s account AND the subsequent deposit of those funds into your account have to be documented. So needless to say if you’re planning to use gift funds from a donor who is very protective of their asset statements you may have an issue when it comes to getting a FHA loan. Similar to conventional financing, cash-on-hand will also pose an issue in terms of using it as a source of down payment funds.
USDA Loans & VA Loans
The USDA and VA loan programs are both “zero down” programs, meaning qualifying borrowers can utilize them without making a down payment. Easy enough right? If you’d like more information on these programs you can click on the following links:
USDA Loans | VA loans
Thanks for reading!