How Much Do I Need for a Home Down Payment?
Purchasing a home has always been the American dream. There are many steps that a potential homeowner must take in order to qualify for the purchase of a home, such as establishing a satisfactory work and credit history. While determining how much of a monthly payment a homebuyer can afford is certainly necessary, a buyer must also consider how much of a down payment will be required in order to purchase her home.
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Government Mortgage Insurance
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Mortgages that are backed by the United States government are insured by either the Federal Housing Authority (FHA), the Department of Veteran's Affairs (VA) or the U.S. Department of Agriculture's Rural Housing Authority (USDA-RHS). Government-backed mortgages frequently allow the buyer to obtain a low down payment loan. For instance, an FHA-backed loan only requires a down payment of three and one-half percent (as of 2011) of the purchase price. FHA loans are open to anyone; however, the VA and USDA-RHS loans are only available to certain qualified applicants.
Conventional Loans
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A buyer may also apply for financing through a private lender or bank. Conventional financing such as this may provide low down payment loans but more frequently will require a higher down payment. It is not uncommon for a conventional lender to require a down payment of 20 percent or more of the purchase price.
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Closing Costs
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Along with the required down payment, a buyer often has other costs associated with the purchase of a home that must be paid at closing. There may be a cost for the title company that processes the paperwork, the lender for processing the loan, inspection and surveyor fees as well as local government fees for recording the documents among others. Additionally, you may be required to pay points on the mortgage. Points are essentially a fee for obtaining the financing at a certain rate. In some cases, you may be able to negotiate with the seller to pay the closing costs or points.
Source of Down Payment Funds
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In most government-backed loans, and some conventional loans. you will need to provide proof of where your down payment funds came from before approval. For an FHA loan, for instance, if the funds are not from a savings account, then acceptable sources include a gift from a relative, employer or non-profit organization, proceeds from the sale of an asset, rent credit, cash not held in a bank and seller or lender credits. Although these sources may be acceptable, you will need to provide documentation before they can be accepted as a source of the funds.
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