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Down Payment Options for Home Buyers

Updated on August 21, 2019
Jesse Omolo profile image

Jesse is a blog post writer with interest in various topics. He believes in sharing information to the world.

Down Payment Options for Mortgage

For many home-buyers, coming up with the money for a down payment is daunting. Today, many lenders offer a range of down payment options.


These options range between 5% to 20% down. For first time home buyers, you can secure an FHA loan for as little as 3.5% down. As you will find out in the article, there are lower down payment options.

Lower Than 5% Down?

You can qualify for an FHA loan for 3.5% down if you are a first-time home buyer

What is a Down Payment?


A down payment is an up-front fee that you make to buy an asset. A down payment represents your commitment to the buy.

Most lenders do not accept loans as sources of funding for down payments. In most cases, home buyers source for funds from their savings.

Down Payment Options


Most lenders offer property financing at 20% down. Unknown to potential homeowners, you can secure a property with a down payment, lower than 20% down. Here are your options.

  1. Mortgages backed by some institutions do not need a down payment. If you qualify, you can get this mortgage at 0% down. These institutions include the Department of Agriculture and the Department of Veteran Affairs.
  2. The Federal Housing Administration (FHA) offers loans with a 3.5% down payment. If you are a first time home buyer, you can enjoy these loans.
  3. If you are a first-time buyer, you can get attractive offers from conventional lenders. These options can range from 0% to 20% down.


Down Payment Options for First Time Buyers

1. You can get a very attractive 3.5 down on an FHA loan if you are a first-time buyer.

2. Apart from the FHA, other lenders offer first time home buyers impressive rates.

Sources of Money for a Down Payment


To qualify for a loan program, you will have to pay a large sum of money as a down payment. The source of the funds is crucial. Before approval, the lender analyzes the origin of your funding.


Here are a few sources of funds for a down payment.

1. Checking and Savings Accounts


Before loan approval, the lender may want to take a look at your account history. In most cases, the bank will want to comb through the last 2-3 months' statements.


Most lenders are keen on the source and location of each deposit. If there are any large or unusual deposits, the bank may ask you to explain.


This scrutiny is to prevent you from financing your down payment with borrowed funds.


You can save for a down payment by suspending significant expenses and trips. You can also finance a down payment with your employer-sponsored 401k.

Always keep a valid paper trail when transferring significant sums through your accounts. The documentation may come in handy when the lender requires some explanation.

2. Mutual Funds, Stocks, Bonds, and Your 401k


The lender may want to take a look at your assets. These assets may include stocks, bonds, and mutual funds. The lender may also offer you the option of liquidating these assets as part of your down payment.


If you have a retirement war chest, you can use the funds to finance your down payment. You can withdraw up to $10,000 to support your down payment.


In case of a liquidation, you have to provide valid documentation of the sale and transfer of funds.

3. Gifts Towards Down Payment


You can buy a house with monetary donations from your family. Sounds simple?

No.

There are strict rules for the use of gifts in financing a house buy.


For the lender to accept a gift, the giver must have no financial interest in the property. Banks do not take a gift payment if it is a loan that requires repayment.


the gift donor has to sign a "Gift Letter." In this letter, the giver has to state the relationship that you share. The donor must also declare that the funds are not a loan.

By signing the letter, the donor can never c lain interest on the sale of the home.


You will also have to provide documentation for the withdrawal and transfer of the funds.

Rules for Down Payment Gifts

The giver must have no financial interest in the property that is subject to purchase. In case of a property sale in the future, the doner cannot demand a cut of the profits.

4. State and local government assistance


There are programs founded by employers, non-profits, state, and local governments. Some assistance programs come with tax breaks and favorable interest rates.


Take some time and research on the programs that are active in your location.


© 2019 Jesse Omolo

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