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 loans and USDA loans, but there are still grants and other low down payment mortgage options.
Low Down Payment Mortgage Options
- FHA 3.5% down
- Freddie Mac’s Home Possible 3% down program
- Fannie Mae’s Home Ready 3% down program
- Grant programs that allow 1% down, 2% grant
- 3% or 4% down payment assistance grants
When choosing low down payment mortgage options, borrowers should go over pros and cons with a Loan Originator.
Tax Proration, Seller Credit, and Lender Credit
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).
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 a 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.
Should You Ask for a Seller Concession When Negotiating the Purchase Price?
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 allow up to 6% seller concession
- Conventional loans allow up to seller concession:
- 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
Excess seller concession 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 in order 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 home owner insurance or home owner 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 credits. When all credits cover closing costs, a borrower can get part of or all of their earnest money deposit back at closing.
Gift Funds for Down Payments and Closing Costs
A gift can be given from a relative or family member of up to 100% towards a home purchase, but in some cases there can be a minimum borrower contribution. The required documentation include proof that funds are either in the donor’s account or have been transferred, a gift letter to certify that it is a gift and no repayment is required, and proof of deposit.
Other Sources that Can be Used Towards the Down Payment
There are other sources besides a gift, checking, and saving that can be used towards down payments and closing costs:
- 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, interest, taxes, home owners insurance, mortgage insurance, and home owner’s association dues (PITIA).