When you buy a home, most loans require a down payment. A “down payment” is the difference between the loan amount (what is being financed) and the sales price. Down payment percentages are based on the sales price. Be prepared for every dollar that is used for your down payment to be documented or sourced (including large deposits reflected on your statements). In addition to the down payment, there may be closing costs and reserves.
Closing costs can be paid by lender credit (via an increase in interest rate) and sometimes the seller can contribute to closing costs. If the seller is paying for closing costs, there may be restrictions based on the program type and the amount of down payment you are making. If the seller is paying your closing costs, it needs to be negotiated in the purchase and sales agreement. Reserves are the savings the lender wants you to have in your account after closing typically measured by months of your proposed mortgage payments. It’s safe to plan on at least two months of proposed mortgage payments to be in your bank after closing for “reserves” whether your lender or loan program requries it or not.
Some home buyers select their mortgage based on down payment requirements. Here are some different programs beginning zero down payment options for homes that are owner occupied/primary residence.
VA Loans. If you served our country, thank you. You may qualify for a VA loan which allows zero down payment and the seller is permitted to pay 100% of your closing costs. Zero down payment is available up to the VA loan limit, which in King, Pierce and Snohomish county is currently $481,250. If your loan amount is above the current VA loan limit, your required down payment is 25% of difference between the loan limit and the sales price. There is no mortgage insurance, however VA loans do have a one time funding fee.
USDA loans. Homebuyers who are willing to live in a rural area and who meet income guidelines can also buy with zero down payment. Like VA loans, there is no mortgage insurance and there is a one time funding fee. Again, USDA loans have income and geographic restrictions.
FHA. Currently FHA will allow a down payment as low as 3.5%. Current FHA loan limits in the greater Seattle area is $567,500. FHA loans do have mortgage insurance (upfront and monthly). Sellers can currently contribute up to 6% of closing costs and prepaids, however this (and possibly the down payment) guideline are expected to change. A family member can gift the down payment requirement of 3.5% which would effective make an FHA loan “zero down” for the home buyer.
Conventional. Conventional programs are Fannie Mae and Freddie Mac programs. If you’re putting down 20% or more, you avoid private mortgage insurance. Any purchase with less than 20% down payment will most likely have private mortgage insurance. Seller contributions towards closing costs and gifts from parents vary depending on your amount of down payment.
Private mortgage insurance rates and guidelines vary based on the loan to value (the amount of your down payment), credit scores and programs. The lower your down payment, the more expensive the cost and the tougher the guidelines are because the loan is more risk for the private mortgage insurance company.
Fannie Mae Homepath. Fannie Mae’s Homepath allows home buyers to purchase a foreclosed home owned by Fannie Mae with as little as 3% down payment, with no private mortgage insurance and no appraisal. Fannie Mae often offers additional “special” incentive programs, including contributing towards closing cost. This program is limited to specific homes that Fannie Mae currently owns.
Non-conforming/Jumbo loans. In the Seattle/King County area, any loan that is over $567,500 is a “jumbo loan”. The loan limit varies depending on what county the home is located in. For homes that are not in a designted ”high cost” area, a non-conforming loan amount is any loan $417,001 or higher.
Plan on at least 20% down payment and having roughly six months reserves after closing depending on how many properties you currently own.
I do have other resources that will allow a lower down payment of 10% down with a loan limit of $600,000 and “self insurance” (slightly higher rate in lieu of private mortgage insurance).
What happened to piggy-back mortgages? Every once in a while I’m contacted by a borrower who is interested in an 80-10-10 which would allow a borrower to put 10% down payment, using a second mortgage to make up for the difference between the first (primary) mortgage and the down payment. Currently, most lenders are offering a maximum loan to value of 75 or 80% 85% which rules out the 80/10/10 scenario. UPDATE August 25, 2011: Some of the lenders we work with are offering second mortgages up to 85% loan to value to well qualifed borrowers.
If you are considering buying a home located in Washington state, I’m happy to review your down payment options with you and help you develop your home purchasing plan.