In Part 1 of this series, I reveal that home buyers qualify for the mortgage payment first based on their income. The next major factor is the down payment and funds for closing. Some may say that the down payment more important than the mortgage payment, however the down payment actually can be a variable; one may be able to obtain gift funds to increase a down payment. You cannot change your income unless you add more qualified borrowers.
Funds for closing include your down payment (the difference between the mortgage loan amount and the sales price) and closing costs that are associated with obtaining the mortgage along with reserves (taxes and insurance) and prepaids (prorated interest, taxes and insurance). Any funds used for closing must be “sourced” or documented and verified. Gifts or loans from family members may be acceptable with the loan program, however the mortgage originator needs to know about them in advance (prior to the loan approval). A seller may also contribute towards allowable closing costs as long as it’s agreed to in the purchase and sales agreement and it meets lender guidelines. Generally, the greater the down payment (home equity), the more that is allowed for the seller to contribute.
Loan programs have different requirements for down payments. If someone has a more siginficant down payment, they may consider conventional financing. And VA and USDA loans still allow for zero down payment. Currently FHA will still allow a 3.5% down payment. If a home buyer wanted to purchase a home with a $200,000 sales price, the minimum down payment with an FHA insured loan would be $7,000 (3.5% x 200,000). Most lenders are going to want to see a minimum of two months of the proposed mortgage payment in the bank after closing, so the borrower would actually need to show they have, at minimum, $7,000 plus two months proposed mortgage payments. There are closing costs and prepaids in addition to the down payment of 3.5%. After the buyer meets the minimum down required, it’s possible that the seller may contribute up to a certain percentage. With an FHA loan, a seller can contribute up to 6% of the sales price towards closing costs and prepaids. There is no limit with an FHA loan as to how much a family member can gift, as long as it meets documentation requirements.
The key to funds for down payment is documentation. Lenders will often use the ending balance of the statements and will require any large deposits shown on the statements to be documented. Someone who shows having $20,000 in their bank account with $5,000 of deposits that they cannot explain, will be treated as if they have $15,000 in the bank. “Cash” is typically not accepted by lenders. If someone has never had any institutional account, they may have an exception but it’s up to the underwriter.
This is why after it’s determined how much mortgage payment you qualify for (which provides the total loan amount), your documented assets will determine how much sales price you qualify for.
If you are considering buying a home located in Washington State, I’m happy to help you determine how much you qualify for.