The rule of thumb with conventional, conforming mortgages is that most lenders will expect a down payment of anywhere between 5% and 20%. Especially now, with more stringent guidelines governing qualified mortgages going into effect in January, lenders are responsible to completely understand the financial wherewithal of borrowers more carefully than ever in order to comply with the Consumer Financial Protection Bureau’s new standards – and to avoid assuming the risk of lending to a borrower who will be unable to make payments down the line.
Of course, there are government mortgages available, namely FHA and VA loans that carry significantly lower down payment requirements, so 20% down isn’t a hard and fast rule. As a matter of fact, FHA only requires a minimum of 3.5% down and VA still has a zero down program. These programs are very attractive but also carry different restrictions than conventional mortgages. Most lenders will look at “the whole package:” your debt-to-income ratio, financial holdings, and other assets when determining what sort of a down payment they will accept on a mortgage loan. There’s no hard-and-fast answer to what you might find when you go mortgage shopping.
When most people think of a down payment, they assume that they must have saved up the full payment amount and have it in the bank, ready to hand over at the outset of the loan transaction. Actually, that’s not the case. Here are just a few alternatives to consider if you don’t have a traditional nest egg sitting in your savings account:
Gift Money. While there are restrictions governing the use of gift money for a down payment, it can be an excellent resource, especially for a first-time homebuyer. Gift money must come from a relative, close friend, employer, public entity specializing in home ownership assistance, or charitable organization. Most conventional mortgage programs for loans with less than a total of 20% down payment require that you use a minimum of 5% of the occupant’s money towards the down payment prior to including gifted money. You will also need to supply proper documentation on the sourcing of all gift monies. It is best to consult a loan officer about gift money restrictions as you begin your new home search.
Liquid Assets. Other acceptable sources of a down payment include funds from savings and checking accounts, 401K and IRA accounts, stocks, bonds, mutual funds, and trust accounts. Important to note is that these funds must spend at least 60 days (preferably longer) sitting in your bank account to prove “seasoning,” or the notion that you are capable of stockpiling and saving money for a length of time without dipping into it. If you do make any large deposits into any of these accounts over the last 60 days, you’ll need to provide proof of its source as well.
Sale of Personal Assets. Selling the family speedboat or RV to give your down payment a boost is a perfectly acceptable form of amassing a down payment. You’ll need to provide proof of ownership and a receipt of sale if you wish to use money from this type of transaction.
In general, lenders won’t accept down payments in the form of cash, personal loans, credit card advances, or a credit card payment. They may also look skeptically upon money that you have lying around that is not in the bank, so-called “mattress money.” Lenders want to know that the money you are using to finance your new home has a legitimate origin and that it is yours to spend. With this in mind, however, there are plenty of options beyond that traditional nest egg, so talk to your loan officer today to find out what is right for you.
