Low Down Payment Mortgage Options | Closing Costs
Wondering about low down payment mortgage options or closing costs? With always changing rules, regulations, and new loan programs, borrowers often do not know about all the low down payment mortgage options available. 100% financing is available through VA and USDA loans, but there are still grants and other low down payment mortgage options.
Low Down Payment Mortgage Options
- FHA 3.5% down payment with a 580 credit score or higher.
- Freddie Mac’s conventional HomeOne and Home Possible 3% down payment mortgage.
- Fannie Mae’s conventional HomeReady 3% down payment mortgage.
- Down payment assistance.
When choosing low down payment mortgage options, borrowers should go over pros and cons with a Loan Originator. Tax prorations, seller credit, and lender credit can help pay for closing costs.
Tax Proration
A tax proration is a credit from the seller for taxes that are due from the previous year. Depending on the state the percent will vary based on the negotiated rate.
What some borrowers do not realize, until they get to the closing table, is that in some cases the full down payment is not required. The full down payment may not be required to be paid at closing due to county and state tax proration.
A seller tax credit only occurs in certain states and can go towards reducing the minimum required investment (MRI). In order to reduce the down payment with a seller tax credit, there would have to be enough or seller credits and/or lender credit.
Lender Credit
Depending on the lender and interest rate, it can yield a lender credit to help pay for closing costs. A lender credit varies based on pricing adjustments and the interest rate. Borrowers can buy down an interest rate, pick an interest rate that neither costs nor credits, or choose one that gives a credit to help pay for closing costs.
Seller concession can help pay for closing costs but vary on every loan.
Seller Concession when Negotiating the Purchase Price
A seller credit is a percent of the purchase price they are willing to contribute towards closing costs. For example, a $200,000 purchase price with an FHA loan will allow up to 6%. 6% of $200,000 is $12,000 credit that can be applied towards closing costs.
Every program has a different maximum seller concession allowed towards home buying closing costs:
- FHA loans allow up to 6% seller concession.
- VA loans allow up to 4% seller concession.
- USDA loans allot up to 6% seller concession.
- For conventional loans, seller concession is:
- Up to 3% with loan to values greater than 90% – principal residence or second home.
- Up to 6% with loan to values 75.01% to 90% – principal residence or second home.
- Up to 9% with loan to values less than 75% – principal residence or second home.
- Up to 2% for investment property.
Seller Credit Greater than Closing Costs
Excess seller credit can go back to the home seller if it is not used. It is important that your Loan Originator estimates your closing costs sooner than later so that seller concession does not go back to the seller. Your Loan Originator can think of creative ways to use excess seller contributions for it not to go to waste. Some ways to use excess seller credit:
- Ask your Loan Originator for specific costs to lower your rate.
- In some cases, prepay homeowner insurance or homeowner association dues.
- Pay upfront funding fees for government loans.
USDA and VA loans do have closing costs so seller concession can help. In some cases, a borrower can have all closing costs paid by seller and lender credit. When all credits cover closing costs, a borrower can get part of or all their earnest money deposit back at closing.
Acceptable Down Payment Sources for a Mortgage
Acceptable down payment sources guidelines will vary based on the loan program and occupancy type. There are other sources besides a gift, checking, and saving that can be used towards down payments and closing costs:
- Bridge loans from other real estate.
- Retirement accounts can be used towards the down payment on a home, if the borrower can borrower from the account.
- Stocks, bonds and treasuries can be used towards the down payment of a home.
- A sale of an item can be used for the down payment of a home as long as it is sourced and verified.
These types of account can also be used for reserves when required. In some cases, borrowers are required to have reserves, which one month of reserve is equal to the monthly housing payment. A monthly housing mortgage payment consists of:
- Principal and interest (P&I).
- Taxes.
- Home owners insurance.
- Mortgage insurance.
- If applicable, homeowners association dues.
Gift Funds for Down Payments and Closing Costs
A gift can be given from a relative, family member, or other acceptable donors of up to 100% towards a home purchase, but in some cases there can be a minimum borrower contribution. The required documentation include:
- A gift letter to certify that it is a gift and no repayment is required.
- Receipt of deposit.
- In some cases, proof that funds are either in the donor’s account or have been transferred.
