Understanding Down Payments for Buying a House

1.) What Is a Down Payment?

A down payment is the initial cash payment you make when buying a home. It’s a crucial part of the home-buying process and is expressed as a percentage of the total purchase price. For instance, if you’re purchasing a $500,000 home and make a $50,000 down payment, you’re putting down 10% of the purchase price. The combination of the down payment and the loan amount will add up to the purchase price of the home.

2.) How Much Should You Put Down?

The typical down payment on a house ranges from 3% to 20% or more of the purchase price. However, the specific amount you’ll need to put down depends on several factors:

• Loan Program: Different loan programs have varying down payment requirements. Here’s a breakdown:
• Government-Backed Loans (VA1 and USDA): These allow down payments as low as 0%.
• Conventional Loans2: Usually require a minimum down payment of 3-5%.
• Jumbo Loans3: May require 10% or more, and most typically 20%.
• Benefits of a 20% Down Payment:
• Lower monthly payments.
• Better interest rates and loan terms.
• No monthly private mortgage insurance4 (PMI) costs with conventional loans.
• A stronger offer in competitive real estate markets.
• More equity in the home.
• 
  

3.) Acceptable Sources for Down Payments

a.) Checking and Savings Accounts

• Lenders will review your 2 months’ statements from these accounts.
• Verify the location and source of your down payment.
• Explain any large or unusual deposits.
• Provide a paper trail for transfers between accounts.

b.) Stocks, Bonds, Mutual Funds, and Retirement Accounts

• Lenders consider your overall assets.
• If you plan to liquidate these assets for the down payment, document the sale and transfer of funds.

c.) Gift Funds

• Some buyers receive monetary gifts from family members.
• The donor must sign a ‘gift letter’:
• States the relationship, contact information, property address, gift amount, and source.
• Confirms that the funds are a gift, not a loan.
• Ensures the donor has no interest in the property sale.

Depending on the amount of down payment and the loan program, some or all the down payment can come from a gift.

d.) Sale of Other Assets

• The sale of a car, boat, RV or other valuable asset can be a source of money for a down payment. Proof of ownership and sale is necessary along with documenting the transaction.

e.) Inheritance

• Receipt of funds from an inheritance is a perfectly acceptable source of funds for a down payment. Properly documenting the account and transfer would be required.

f.) Tax Refund

• Money received from an income tax refund is perfectly acceptable as it is simply a refund of an overpayment of income taxes on your part.

g.) Funds from an Equity Line of Credit secured by Real Property you own.

• While unsecured loans from others or banks (advances on credit cards, etc.) are not acceptable sources of a down payment, funds derived from a secured line of credit on a property you own is acceptable. It is an acceptable source of funds because you are withdrawing some of your equity from an asset. Of course, you will need to factor in the debt service (payments) on the equity line and consider those payments as part of your debt-to-income ratio calculations.

h.) Down Payment Assistance programs.

• Certain governments and municipalities cooperate in various programs to assist First Time Homebuyers with the down payment5 .

Remember, documentation is key as to the source of your down payment. Funds cannot appear out of thin air and be accepted. While a 20% down payment is ideal, it’s not mandatory. Many buyers put down less and still achieve their homeownership dreams. If you have questions about whether the source of your down-payment is acceptable, please reach out to me and inquire.