When applying for a mortgage loan, there are certain funds that are acceptable and not acceptable to use in a mortgage transaction. A lot of potential home buyers think they need a large down payment of 20% to purchase their new home. The advantage to using a conventional loan and putting 20% down is that you avoid paying an additional insurance in your monthly payment called private mortgage insurance (PMI). The PMI rate that you pay will depend on the size of your down payment and credit score. The higher the down payment and higher the score, the lower your PMI payment will be.
DOWN PAYMENTS VARY BY LOAN TYPE
With a conventional loan, the minimum down payment required if you have owned a home within the past 3 years can be as low as 3%. For home buyers that have owned a home within the past 3 years, the minimum down payment is 5%. Other loan types allow for lower down payments as well. An FHA loan allows for down payments as low as 3.5%, USDA Rural Development loans allow for zero down payment and if you are a qualifying Veteran, the VA home loan allows for down payments as little as zero as well. Government are insured or guaranteed by the government to allow home buyers to purchase with little or no money down. The borrower will pay an upfront funding fee and/or monthly mortgage insurance for utilizing the program. At the time of writing this post, FHA charges an upfront fee of 1.75%, Rural Development is 1% and the VA charges 2.30% if the Veteran is using their VA home loan option for the first time and 3.60% for subsequent use.
GIFT FUNDS FOR DOWN PAYMENT
If you have not quite saved up enough for the down payment and closing costs to purchase a home, a gift of money for a down payment can come from an immediate family member, long standing relationship with a friend, or your employer. Be aware that you will have to prove the relationship to the gift donor, complete a gift form jointly with your donor and paper trail the money from their account to yours using bank statements, canceled checks, etc.
DOWN PAYMENT ASSISTANCE PROGRAMS
There are also down payment assistance (DPA) is available in most areas. One of the largest here in Michigan is offered through the Michigan State Housing Development Authority (MSHDA). At the time of writing this post, $7,500 is available in most areas and up to $10,000 in certain zip codes throughout Michigan. The amount of down payment assistance is not forgiven. The amount of down payment assistance used will need to be repaid when you sell or refinance your home in the future. MSHDA DPA funds can be used in conjunction with conventional, FHA, Rural Development and VA home loans. If you are utilizing a loan program that has zero down payment, the down payment assistance can be used for closing costs as well! These programs are meant to assist homebuyers with moderate income which varies per county and/or zip code. Contact us to see if you qualify for the MSHDA down payment assistance program.
RETIREMENT AND INVESTMENT ACCOUNTS
You can withdraw money from a retirement or investment account to use for your down payment and/or closing costs. You will need to provide two months most recent statements for the account and will need to provide the terms and conditions for that account. The terms and conditions states how money can be withdrawn and what potential penalties exists. Once you transfer the money to your checking or savings account, you will need to provide an updated statement or account activity printout from your retirement/investment account to show the money coming out of that account. You will also need to provide an updated bank statement or account activity printout for your checking or savings account showing the money being deposited. Check with your financial advisor before withdrawing any funds from these accounts to see what potential penalties exist.
EQUITY FROM YOUR CURRENT HOME
Another option you can use to sort of “bridge” the equity from your current home is a home equity loan or line of credit. Typically, a home equity loan lender will allow you to pull out up to 80% of your current appraised value minus your current mortgage balance. For example, if you have a home worth $200,000 and you have a current mortgage balance of $100,000, you can obtain a home equity loan/line of approximately $60,000 ($200,000 X 80% = $160,000 minus $100,000 = $60,000). You will need to qualify for your new home with the new home equity loan/line included in your debt to income ratio, so be sure to check with your loan officer before obtaining a home equity loan. Also, some home equity loans and lines can have a pre-payment penalties. That means if you pay off the loan before a specified amount of time, you will pay a penalty for paying it off too early. You will want to check with your home equity loan lender to see that potential penalties exist.
We offer a free, no obligation pre-qualification when you are ready to see what loan options you might qualify for. Simply click here to submit your application for a home loan pre-qualification and we will contact you soon.