How Much Down Payment Do I Need for a Mortgage
When preparing to buy your first home or you’re reviewing your financing options there are some things you really need to nail down early. You’ll want to decide on the type of mortgage that works best for your situation. Once you make that decision you’ll then decide between a variety of interest rate options available for your selected mortgage. These decisions are made after discussing your current situation as well as your financial goals with your loan officer. Your loan officer will review your income, credit and assets. Qualifying income from your employer or your business will be verified as well as running a credit report and requesting credit scores.
Your lender will also ask for copies of your bank and investment statements or from any account being used to cover closing costs and your down payment. Your loan officer can provide you with a loan estimate that will list closing costs you can expect to see. But depending upon the type of loan you select, your minimum down payment requirements can vary. How much down payment will you need?
That completely depends upon the requirements of a specific mortgage. If you’re a veteran or otherwise eligible for a VA loan, there is no down payment needed. USDA loans, loans designed to finance real estate in rural or semi-rural areas, are also a zero-down option. The other government-backed loan, the FHA program, asks for a down payment of 3.5%. Note, these are the minimums, you can certainly make a larger down payment if you want.
Conventional loans, those underwritten to standards issued by Fannie Mae and Freddie Mac ask for a minimum down payment of 5.0%. Fannie has a special loan program for first time buyers that asks for a down payment of only 3.0% of the sales price. However, note that any conventional loan with a down payment less than 20% of the sales price requires an additional mortgage insurance payment if there is no subordinate second. Jumbo loans, those that exceed conforming loan limits set by Fannie and Freddie, typically ask for a down payment of 20% but there are jumbo programs that ask for a down payment of 10% down.
Down payment funds must come from an account or accounts you own. They should also be “seasoned” which means available funds must have been yours for at least 90 days. If your bank statement shows a lump sum payment that cannot be sourced such as coming from your employer, the lender will want to determine the funds are not borrowed. If the source of funds can’t be identified, such as a gift from a family member, a qualified non-profit or a grant, it’s likely the funds can’t be counted when the loan goes into underwriting.