In this article, we will discuss and cover the down payment and closing costs of a home purchase. Two costs home buyers need to consider when purchasing a new home are the down payment and closing costs. Depending on the mortgage loan program, there is a minimum down payment required. For example, for an FHA-insured mortgage loan, the minimum down payment required is a 3.5% down payment. The minimum required for a conventional loan for an owner-occupied primary residence is a 5% down payment.
The minimum down payment and closing costs required for a second and/or vacation home is a 10% down payment. The minimum down payment required for an investment home mortgage loan is a 20% down payment. The minimum down payment required for a condotel unit mortgage loan is 25%.
Both VA loans and USDA loans do not require any money down. Besides the down payment, all home buyers will need to pay closing costs. Closing costs are costs associated with the purchase and finance of the subject property. Examples of closing costs are discount points, appraisal fees, title charges, transfer fees, county and state fees, insurance, and other fees associated with the home purchase. Closing costs vary from county to county and state to state.
In general, closing costs can average 2% of the home purchase price. Down payment and closing costs are costs associated with the home purchase. The down payment is mandatory and the earnest money can be used as part of the down payment. Closing costs can be avoided if the home buyer can get a seller’s concession towards the home buyer’s closing costs.
All down payment needs to be sourced. For example, if you have mattress money ( cash ) and cannot source it, that cash cannot be used to source the down payment. Banks require two months’ bank statements and if you have undocumented cash, which many folks do, then you need to make the cash deposit and let it season for 60 days. This way, the funds are now seasoned and you do not have to worry about providing sourcing. Cash does not exist in the mortgage industry.
All funds need to be sourced and tracked. For example, if you have an irregular deposit of $5,000, where did it come from? If it was from a sale of a vehicle, the copy of the bill of sale, a copy of a check from the buyer, the title to the vehicle, and the deposit slip will be required in order to use the $5,000 irregular deposit towards the down payment.
HUD allows 100% of the down payment to be gifted by a family member of the home buyer. A gift letter needs to be signed by the donor stating that the down payment that is being gifted is a gift and that the gift funds are not a loan and will not be paid back. 30 days of bank statements are required by the donor to see that the funds have been seasoned in the donor’s bank account. The funds leaving the donor’s account and being transferred to the recipient’s account will need to be provided as well. If the donor gave the recipient a check then a copy of the canceled check will be required.
As mentioned earlier, down payment and closing costs are the two costs required for a home purchase. Most home buyers normally do not have to worry about the closing costs. This is because closing costs can be covered in two ways. The first method where a home buyer can avoid paying closing costs is by getting a seller’s concession towards a buyer’s closing costs.
If the home seller is adamant in getting a minimum of $100,000 for their home, then the contract can be inflated by $3,000 for a total purchase contract price of $103,000. The seller can give the buyer a 3% seller’s concession towards the buyer’s closing costs. However, any excess in the seller’s concessions cannot go to the buyer. It needs to be returned to the seller so homebuyers should not ask for more sellers’ concessions than the actual closing costs.
FHA and USDA allow a maximum of 6% seller’s concession towards the buyer’s closing cost credit. VA allows a maximum of 4% sellers concessions. Conventional loans allow a maximum of 3% sellers concession towards the buyers closing costs. In the event, if the home seller is not willing to give a seller’s concession towards buyers closing costs, then the lender can cover part, if not all, of the closing costs by giving the borrower a lender credit towards closing costs in lieu of a slightly higher mortgage rate.