What is a Down Payment with Regard to Buying a House?
A down payment refers to the money that money you need to pay upfront when buying a new house. It is often paid along with the home loan in order to fulfill the obligation of buying a new home. Aside from paying the down payment, your credit history, credit score, total debt, as well as annual income could affect how much of the loan you will be able to qualify for.
Remember that the higher the amount you will pay for your down payment, the lower your monthly mortgage will be. The amount that is required for the down payment will mainly depend on your type of loan. Generally, you need to save as much as 20 percent off the overall sale amount in cash to be qualified for the fixed mortgage loan.
Down payments for loans that involve a huge amount can be as low as 10 percent. If you will pay less than 20 percent of the conventional loan, you will end up paying for the mortgage insurance, whether it is public or private, depending on the loan type. Here are all the sections that will be covered in this article.
- How Much of a Down Payment Do I Need for a House?
- Earnest Money Deposit versus a Down Payment
- How to Calculate the Down Payment
- Down Payment Calculators
- How Do Down Payment Assistance Programs Work?
- Using 401(k) for Your Down Payment
- Can You Buy a House with No Down Payment?
- How to Buy a House with No Down Payment
- Bad Credit Mortgage Loans No Down Payment
- How to Save for a Down Payment
- Home Loans with No Down Payment
- What is an FHA Loan?
- Using Gift Money for the Down Payment
How Much of a Down Payment Do I Need for a House?
Most of the lenders will normally require for a 20 percent down payment. So for a $300,000 home, this is equivalent to $60,000. For a 20 percent down payment, then lenders will love you even more and there is a bigger chance of you getting approved of the loan. Moreover, you will earn a much better mortgage interest rate in doing so. There are several other benefits that you can get out of making such a favorable down payment, and these are some of the following.
- Lower ongoing fees.
- Lower upfront fees.
- More equity for your home right off the bat.
- Much lower monthly payment on your mortgage.
But here’s what you should also take into consider – your down payment will not be the only upfront money that you need to deal with. You also need to think of the loan closing cost as well as the earnest money. Depending on how much money you have, you may want to consider exploring some other lower down payment options.
Earnest Money Deposit versus a Down Payment
A lot of first time homebuyers tend to confuse an earnest money deposit with down payment. A down payment is basically a certain percentage of the sale price that the homebuyer will have to pay out of his or her pocket.
There are some homebuyers who are lucky enough to just be asking money from their parents for the down payment of their home. The balance of the cost of the purchase price right after a down payment will be deducted is the overall amount of the mortgage that you need to pay.
The earnest money deposit is basically the amount of money that you will pay in order to secure the contract to purchase the house. It is basically part of the down payment and will often be based on the local home buying customs.
The deposit could vary in amount, from as low as $100 to as much as $500. For more expensive properties, it could reach up to $50,000.
The earnest money will normally depend on the sales price of the home property. In most cases, the earnest money is between 1 to 3 percent of the overall sales price. This money could be at risk if the buyer will be defaulted on contract, also known as the liquidated damages. This money is basically a proof that you really have a good intention of buying a new house.
In various offer situations, buyers who will pay for a larger amount of earnest deposit will normally gain advantage. Although it is pretty much similar money to the seller, the sellers will often consider a huge amount of earnest money deposit as a sign that indeed, the home buyer is committed to buying a new home and is dead serious in owning one.
How to Calculate the Down Payment
The down payment for a mortgage is easy to compute, and yes, it is possible to do so before you apply for a home mortgage.
- First of all, determine the sales price of the property you are planning to buy. If you are not doing any negotiation with the seller, the price of the property for which it’s listed should work. For instance, if the house you are buying is listed with a $100,000 price, then use this figure for your computations.
- Next, multiply the purchase cost to 5 percent, and this is the amount of down payment that will be required for most mortgages. Thus, if you multiply the $100,000 sales price to 5 percent, then this is equivalent to $5,000, and such amount is what you will pay for the down payment.
It should be noted that you may also have to pay for a private mortgage insurance if in the event that the amount of your down payment ends up to be less than 20 percent of the overall purchase price of your home property. The insurance is like a fee that the lender will charge to the borrower in order to protect him or her in the event that the borrower will be in default. As such, the party who will be able to benefit from the PMI is the lender.
In order to avoid having to pay the insurance, it is better to make a down payment of about 20 percent. You can simply multiply 20 percent off the selling price and you will arrive with the amount that you will pay as your down payment.
Down Payment Calculators
If you cannot figure out your down payment by yourself, then you can make use of the down payment calculators online. When you do a search, you will surely find several websites that will allow you to use online down payment calculators.
The manner in which these calculators work will vary greatly, depending on the website that offer these. However, most of these calculators will require that you input certain information such as the purchase price of the home property you intend to buy, the terms of the mortgage loan, interest rate and many more. It is important that you enter price information on the calculator so you will be given precise answer as well.
How Do Down Payment Assistance Programs Work?
The down payment assistance, from the name itself, is something that could assist you during the process of buying a new house. This occurs if a certain portion of your down payment will be funded by the government, which is mostly at a state or local level, by nonprofit and charitable organizations and by a charitable organization and other public entity, as well as through a labor union or by your employer. There are also instances where lenders have down payment assistance programs to help out in paying for the down payment required when buying a new home.
One of the requirements for using any type of the down payment assistance is that it should be available for the general public during the process of application and it is not something that’s created specifically for you. In the past, sellers will usually help the buyer with the down payment by means of an intermediate service that has kept an account for the homebuyer. This practice has ended because of a law change that took effect last 2008.
Just because the seller cannot help out with the down payment does not mean that you cannot negotiate with the sellers for some other items to be part of the transaction. The seller may be able to contribute into things like fees for the real estate tax services, attorney fees, title insurance, etc. They could also help out in paying for points that are paid upfront in order to help lower the interest rate and contribute with the cost of the property taxes.
There are also limits to how much the seller could contribute, depending on the type of mortgage loan that you will choose. Make sure that you discuss these limits and some options or alternatives, with someone who is an expert with home loans.
Here’s how you can find a down payment assistance program. Some of these programs might just be available within your area, if you just know where to find them.
- Assistance and grants available to the public – some of the grants available for the public might be aimed at certain groups and it might take a while to track these down. However, they are definitely well worthy of your time.
The best place to begin your search is through the Dept. of Housing and Urban Development. They have come up with a list of assistance programs that are available for each state, including in where you live. They may also list down programs that are unique for the city where you are looking to buy a home property.
- The 1% down program – Quicken Loans have a grant program for any qualified homebuyers who will be buying a single unit condominium, primary residence, planned unit development, as well as townhouse. You can choose to place a one percent down payment and then earn a 2 percent grant of equity from the Quicken Loans, provided that you meet the qualifications they have set.
Using Your 401(k) for Your Down Payment
Buying a new house can be pretty overwhelming, yet it is one of the most important steps towards securing a good future. However, saving for your down payment can take a very long time. But if you already got some funds in retirement account, such as the 401k, you might actually be able to use those as your down payment.
There is really no specific penalty exemption for home purchases when it comes to pulling your money off your 401k account. Thus, any money that you will take out will be considered as hardship exemption. You will be assessed with a penalty of about 10 percent of the amount you have withdrawn and you need to pay for the income tax as well.
As much as possible, consider rolling over the amount that you wanted to withdraw so you will not be charged with penalty. But remember that you cannot roll over the 401k that is with your employer whom you are working for. If you’ve got an old 401k from your former employer, consider rolling that. Because a rollover will usually take time to be processed, consider filling all the necessary paperwork as early as possible.
Another option for using your 401k is to take out a loan. The loan could be as high as $50,000 or just half of the amount of money in your account, whatever is less. As long as you can afford to make the payment, this is an often less expensive alternative as compared to withdrawing your 401k to be used as down payment. Although you will end up having to pay for the interest, you will not have to pay penalties or taxes for this type of loan.
There are some things that you need to know regarding this type of loan, however. Since you will be incurring debt for taking out the loan, you must make monthly payments for the loan and thus, your ability to apply for a home mortgage could be affected.
In addition, most of these plans will only give you five years to pay off the loan. As such, if you will borrow huge sums of money, then expect to pay huge amount each month. Moreover, if you end up resigning from your company, you might be ask to pay the outstanding balance of the loan within 90 days or you can be forced to take this as hardship withdrawal. As such, you will be slapped with penalties and taxes on the remaining amount you owed.
Before you take advantage of this loan, it is wise to ask the mortgage broker on how this loan could affect your mortgage qualification before you push through with it. Alternately, if the money you need would have an adverse affect on your mortgage qualification, it might be a much better option to withdraw from your 401k for the amount you need and then pay any penalties and taxes.
Can You Buy a House with No Down Payment?
Yes, it is possible to purchase a house without paying for any down payment. If you got little or no money for a down payment of a new house, you may want to find some options that will allow you to buy a property with zero or less down payment. Here are the options available for you.
The U.S. Department of Veterans Affairs has guaranteed purchase mortgages without any down payment, ideal for qualified veterans, including active duty service members, as well as certain members of the National Guards and Reserves. Private lenders can grant VA loans, which the VA will guarantee.
There is really no mortgage insurance when it comes to this. However, the borrower will need to pay the funding fee that can be rolled to the overall amount of the loan. For construction and purchase loans, the VA funding fee will vary, according to the size or the amount of down payment and whether the borrower has served the regular military, or is part of the National Guard.
Another option of a no down payment mortgage is from the Navy Federal Credit Unit, which is considered as the largest in the country in terms of membership and assets, and offers a hundred percent financing for qualified members who will purchase primary homes. The eligibility of the Navy Federal is limited only to members of military and some of the civilian employees of the Dept. of Defense, as well as their family members.
Their zero down payment option is almost similar to that of the veterans’. The only difference is the cost. The funding fee of the Navy Federal is 1.75 percent less than the funding fees of the veterans.
Another option is from the USDA or the Dept. of Agriculture, which is known as the rural development mortgage program and is very popular, that it has been said to run out of funding before the end of the fiscal year. In fact, some of the borrowers are shocked to find that the rural development loans are not actually confined only to farmland.
The USDA has placed some maps on their website highlighting the areas eligible for this program. Aside from the geographical limitations, the program also has restrictions in terms of their household income and that these are intended only for first time homebuyers, but there are also exceptions when it comes to this.
The USDA mortgage will come from the bank and there will not be any mortgage insurance to be paid. Instead, the USDA will levy a one percent upfront fee and this can be rolled over to the loan amount as well as an annual guarantee of about 0.35 percent of the overall loan balance.
If you do not qualify in any of the above scenarios, qualified buyers can choose to make a down payment of as low as 3 percent along with mortgage insurance, or the PMI. For most of the homeowners, the PMI will cost less than the mortgage insurance of the Federal Housing Administration. However, PMI tends to have stricter requirements for credit.
How to Buy a House with No Down Payment
As stated above, it is possible to purchase a house without having to pay for a down payment but only if you qualify for any of the options explained above. If you do qualify, here’s how you can purchase your home without having to pay for the down payment.
In order for you to be able to apply for the VA loan, you should first obtain a COE, or the Certificate of Eligibility, which you can obtain from any of the VA eligibility center. All it requires is to prove your military service. Right after you obtain the COE, you can then look for any mortgage lender that provides VA loans.
When you acquire a VA loan, you are not only exempted to pay for the down payment, but also for the mortgage insurance, which is up to 2.15 points, where 1 point is equivalent to 1 percent of the overall loan amount, can be wrapped to the loan. The loan qualification will vary greatly, depending on the lender you have worked with, although in general, the VA loans will require for a debt to income ration of 41 percent.
As for the USA loan, in order for you to qualify, you will not only need to be eligible for the location but you must also conform to the limitations on income set by the government. You can refer to the website of the USDA to know if you qualify for such a loan. On the website, all you need to do is to enter your zip code, number of members in your household, including the income you are earning. The website will then check if you are eligible.
The USDA loans, as mentioned above, are ideal for households with low to moderate income and have the income enough to pay for the home payment, yet do not have the money for the down payment. There will be a minimum credit score required for this and it will vary from one lender to another although it should be around 600 to 640 and above.
This loan will require an upfront loan guarantee fee, which is 3.5 percent of the loan amount needed, although borrowers can choose to wrap that fee to a loan balance in order to avoid having to use cash during closing.
Bad Credit Mortgage Loans No Down Payment
As you know, getting approved for a mortgage loan with bad credit will not be easy. This is especially true during a market crash where subprime loans have almost disappeared. But do not worry, for you will have options for mortgage despite having a bad credit.
The FHA loans will allow borrowers to only have at least 500 credit score in order to be eligible. So here are more ways on how you can get approved for a home loan given your imperfect credit score, however you may be interested in finding out how to improve your credit score.
First of all, it is important that you choose the right loan for you. Figuring out the right type of loan for you can be as easy as doing some research. You will need to start by researching about your own finances. You must pull all of your credit reports from the credit bureaus and find out what your credit score is.
It is important that you first review your credit history in order to know how bad your credit score is. If your score is just too low, then you need to do something to improve it before you consider applying for the home loan. There are lots of trustworthy websites that can provide your credit score for free.
You may also need to consider a lending network. For those who wanted one stop shopping when it comes to applying for a loan, a lending network is perhaps the best place to start looking for the right mortgage for you.
Lending networks will connect several dozens of lenders all over the country and provide users with various custom offers. Because of the nature of such lending networks, you could receive offers coming from unfamiliar companies or from some out of state lenders. Make sure that you do enough research about the lender you will choose before you make any kind of commitment.
Another option is to apply for an FHA loan. Perhaps, the most popular type of a government-backed mortgage is the FHA. The FHA loan is one that’s secured by the Federal Housing Administration, or FHA, which reduces the risk that the mortgage lender will face when approving a loan for someone with bad credit.
This added security helps to encourage lenders to lower the credit score requirement, as well as the down payment. In order to qualify for the FHA mortgage, you must have a credit score of at least only 580, although the minimum credit score requirement will vary from one lender to another.
The good side about this is that you will only need to pay for a down payment of 3.5 percent of the total purchase price of the home. Not every lender or bank will offer an FHA backed mortgage, although a lot of them should. But remember that not every lender could offer FHA loans and not every house can be bought using such loan. Make sure that the home you are interested in buying qualifies for the financing that you wanted to use.
There are also mortgage programs and companies that will not require any down payment for a mortgage. Although it will always be better off paying some down payment for a mortgage, sometimes it is just not feasible. Your options tend to become limited without making any down payment and this could cost you even more in the long run since the monthly payments will be higher. The good news is that there are options when it comes to this and one of these is to take private mortgage insurance.
For most lenders, anything that is less than 20 percent down payment for your mortgage loan can become risky. In order to combat this risk, almost everyone who will pay less than 20 percent of his or her mortgage will need to pay the mortgage insurance and this is what will compensate the lender in the event that you are defaulted on your loan.
Taking a much bigger mortgage insurance premium can also help to lessen the amount of down payment that you will be required to provide, and others are qualifying for a zero percent down payment loan but with enough mortgage insurance.
There are also some compensating factors of a bad credit. Thus, if you’ve got a poor credit rating, you must show some compensating factors that can help to make up for this. You must also show a proof of financial hardship that was the reason why you have fallen behind your bills and that you also need to prove to them that you have already recovered and that you’ve re-established your credit once more.
Usually, if you are having a poor credit, the loan you are trying to acquire will have to go through a manual underwriting. All these compensating factors can help to minimize the risk of the lender and thus, increase your chances of getting approved of the loan even if you’ve got a bad credit history.
Another option is to qualify for grants and down payment assistance. So check if you qualify for the down payment assistance or any of those federal grants. You can search the website of HUD in order to search for these local state programs that you could qualify for. Your county or city must also provide any available programs on their website, which you can check out.
The VA home loan, which was discussed above, is one of these. These loans come with so many benefits including not having to pay for down payment and no mortgage insurance will be required. The VA will not require any minimum credit score for as long as you are eligible.
How to Save for a Down Payment
Except if your family belongs to the rich and famous, the odds are you may need to largely gather some money together in order to save for the down payment of your house. This may be a difficult task, but your efforts will surely be worth it.
First of all, open a savings account where your savings will be kept. You can also choose to open the account on the same bank that handles your checking account. This way, you can choose to move your money from your checking and into your savings account in the future.
Next, start making a budget. You can make use of a spreadsheet for this where you need to identify your monthly gross income and then subtract all your expenses, taxes and other costs. The money that will be left could probably go to your savings for down payment.
Since the income and expenses tend to closely match in various households, the only way you can get ahead on this is to bring more money in or perhaps change the manner in which you spend your money. You need to be ruthless in order to be successful with your savings. Spend some time to review your spending as well as your budget. Perhaps, you can do so every first as well as third Monday of every month, or whatever is more convenient for you.
Read our extensive guide on saving money too.
Home Loans with No Down Payment
Buying a home will indeed require an important decision, something that may have an impact in your finances and credit, unlike other purchases would. Most homes can be bought through a mortgage. However, a traditional mortgage loan will require that you pay for the down payment of at least 20 percent, which a lot of people may not be able to afford.
But as already discussed above, you will find that there are lots of programs out there that were designed to help you get that loan without having to make any down payment and here are some options.
- USDA loans – these are also called the rural loans, where there are only certain places that will be eligible. The loans offered by the USDA are available for those only who have a decent credit score and have a steady income that will not exceed median requirements. Homes that are on certain urban areas may not be eligible.
- VA loans – this has already been discussed above, and VA is the loan that the Veterans Affairs would offer for all veterans as well as to their surviving spouse, allowing them to buy a house without having to pay for any down payment. There will be a funding fee however, which ranges between 1.5 percent and 2.15 percent, depending on which branch of the military that the applicant served, and on how many times that they have acquired for the VA loan.
- FHA – this is a loan offered by the Federal Housing Administration, and perhaps, one of the most popular home loans without any down payment required. This is also the best option for those who have bad credit and are trying to acquire a mortgage.
- Credit union financing – there are also certain credit unions that will offer low to no down payment for qualified individuals who have met certain qualifications. For example, the Navy Federal Credit Union is offering a full mortgage financing for individuals who are a member of the military, including their family members, as well as some civilian employees belonging to the Dept. of Defense. There are also other credit unions that offer a potential zero down financing, such as the Travis Credit Union as well as the NASA Federal Credit Union.
- First time homebuyer program – there are various programs that are available for first time homebuyers. Sometimes, these types of programs are being offered by a particular credit union or bank, although the government is offering several of these as well.
These programs could vary in criteria, credit requirements, income limits, etc. They may also be limited only to certain home properties with specific value. Moreover, the requirements might differ from one state to another so you better check with your lender.
- PMI – the PMI or Private Mortgage Insurance is another option for acquiring a home mortgage without any down payment. This will typically kick in if the down payment is just less than 20 percent of the entire purchase price.
Although PMI can be removed off the mortgage as soon as a repayment threshold will be reached, this could drive up the monthly payments significantly. Some programs will not require this, but others will. Again, you better check with your lender to find out more about this and determine in which categories your mortgage program will fall into.
As you see, homebuyers who cannot afford to pay for down payment certainly have lots of options. So if you are planning to buy a new house, yet you do not have enough money for the down payment, you may want to consider any of the options above.
What is an FHA Loan?
In general, in order for you get approved of a mortgage loan, you must have at least 640 for your credit score, and this is what makes it impossible for various home buyers who have lower credit scores to be able to acquire a mortgage. This is why the FHA mortgage is created.
The Federal Housing Administration is the organization behind this loan and was created in the year 1934 in an effort to increase the number of home ownership in the United States. By insuring the mortgage loans, the risks that lenders will face will be greatly reduced.
It is so much easier to avail of this government home loan as compared to the conventional mortgage due to the lenient requirements. You can also choose between 15 and 30 year fixed mortgage, or perhaps an adjustable rate mortgage loan. The bad credit home loan is a term that refers to FHA mortgage, also known as the subprime loan.
Since the FHA home loans are often insured, they are less risky for the lenders, which allows them to lower the minimum requirements of obtaining a loan. You will no longer need to achieve a 620 credit score just to get approved. As a result, even those that have bad credit could get approved of this loan.
These bad credit loans are often referred to as the subprime mortgage. Furthermore, the FHA loan will allow poor credit scores that are as low as 500 with only 10 percent down payment, as well as a 580 credit score and will only pay 3.5 percent for the down payment.
FHA loans have become a popular loan alternative for most first time homebuyers because of their bad credit as well as the lenient requirements for down payment. The loan also helps to make it easier for them to be able to qualify for the conventional loan.
The FHA loans will also allow for the gift funds of down payment. This means than one hundred percent of the down payment amount could possibly come from a monetary gift from a family member or a friend.
First time home buyers could purchase a new home without having to pay for the down payment but only if they will qualify for the homebuyer programs. There are several grants for first time homebuyers and there are even down payment assistance programs that they could qualify for.
Using Gift Money for the Down Payment
You probably thought that you could pretty much use whatever money you received from your family and friends for the down payment of your home. But using the gift money for your down payment is not really as easy as you think. Whether the amount is $20 or $20,000, it is important that you identify your source of funds. In order to understand why knowing the source of your funds will be important for the mortgage company, you must first understand what an underwriting is and how this could have some effects in your loan.
Underwriting is a term that is used to refer to that process where the lender will examine your credit score, learn about your assets and income and figure out how risky it would be for them to lend you the funds that you need for your new house. When the underwriters will examine your assets, they will also determine if that money that’s in your bank account is indeed your own. They basically want to make sure if any of the large deposits made into your account are indeed gifts from family and friends. This is very important in order for them to be assured that you can indeed afford to pay for your mortgage if they will lend you.
If you will use a personal loan in order to qualify for the home mortgage loan, then there is a possibility that you will face a financial mess when you start to pay for your loans back. So how will the underwriters establish that the money in your account is indeed gifts and not a loan you have personally obtained? They will require for the giver of the gift to come up with a letter.
If you will be using the gift money to be part of your down payment, you may need to ask the donor to come up with a letter addressing the mortgage company and telling them that the money is indeed a gift from them and not some loan you have acquired. These are the things that should be included in the gift letter.
- Name of the donor, phone number and address.
- Amount that was given.
- Relationship of the donor to the client.
- Date when the funds were transferred.
- Statement from the donor indicating that there is no repayment that he or she expects from you for such money.
- Signature of the donor.
It should be noted that the letter in itself might not be enough proof that the mortgage company will need. If you will be acquiring an FHA loan, then the person giving the funds will have to provide for a bank statement, along with the letter, so you may want to let your family or friend to know this.
Another important thing to remember when it comes to using the gift money is that the amount of the gift money that you will use and the amount of money you will pay for the down payment will have an impact in the type of loan that you can acquire.
For instance, if you are applying for the conventional loan and if you will put in at least 20 percent, then this all can come from a gift. On the other hand, if you will put less than 20 percent, some parts of this money could come from the gift but some part should also come from your own funds. Such minimum contribution will vary on the type of loan.
If you are applying for FHA or VA loan, then you can have the entire down payment to come from the gift money. If your credit score is within 580 and 619, then at least the 3.5 percent of the down payment should come from your own funds. You can only be allowed to use the gift money for some primary residences. It is important to remember that the rules could change so you better check with the mortgage company before you apply for the loan.
The timing as well as the amount of money that’s given to you could also impact the underwriting. For instance, certain mortgage companies will require for a 60-day history of all your assets in order for them to evaluate if you could qualify for the loan. For as long as you’ve got the documentations available in the past 60 days, then they could take it from there.
If you have made any deposits in the past 60 days that seem to be far from the ordinary, then the underwriter could question these regardless of how much you are earning. For instance, if the client will only maintain about $400 balance in a regular basis, however, all of a sudden, you have made a $5,000 deposit, although such amount may not be more than 50 percent of your overall income, this could raise a red flag for them. Thus, if you know that you will soon be applying for a financial gift for your down payment, then make sure that you document this and present to your mortgage company.
We’ll leave you with this video and the tip that you should start saving up money as early as possible.