The Mortgage Brothers Show
Top 10 Questions about Down Payments
In this episode of the Mortgage Brothers Podcast we covered your most common questions about down payments.
One very common misunderstanding for home buyers is the cash requirements for a down payment. How much do you need? What programs are out there for low down payment options? What is private mortgage insurance and is it bad? Where do the funds need to come from?
1. Can I use money from my business accounts as part of the down payment?
This only really applies to self-employed borrowers because they’ll likely have both personal and business bank statements. They want to be able to borrow money from their business and move it over for personal use. Now you can do this, but it can be a little tricky and you have to make certain that your business doesn’t suffer from it.
Your CPA is going to have to at least sign a letter stating that the funds you’re going to use from your business account will not jeopardize your business operations. Let’s say you have a business with ten employees and you have $80,000 in your business account. If you take $75,000 out of that account you’re not going to be able to make payroll, but if you’ve got $200,000 in your business account and you need an additional 8,000 from your business to help supplement the down payment, that’s relatively insignificant when compared to a $200,000 balance.
2. Can I use cash or a gift as part of the down payment?
You cannot use cash for down payments when underwriting loans. To do so, you’ll need to deposit it into your account and wait a seasoning period of about two months. You will also need to identify that it came from you and that it is not a loan.
Now, you can receive money as a gift and use that, but it has to come from a relative. As well, gifts are allowed on down payments if you are buying a primary residence, but if you’re buying a second home you need at least 5% of your own down payment. If you’re going with an investment property purchase, there are no gifts allowed. That down payment needs to come 100% from you.
3. Do I have to put a larger amount down on investment properties?
Yes, typically it’s 5% down for primary, 10% down for a second home, and 15% down for an investment property if it’s a single-family. If you move into the multi-family world then you get into 25% down.
4. What is the minimum down payment for a mortgage (Are there zero down mortgage loans)?
The minimum down for a conventional loan is 3% and the minimum down for FHA is 3.5%. Now, you do have to qualify for that 3% and, if you don’t, it’s typically around 5%.
In terms of zero down mortgage loans, the only ones are the VA and USDA loans. However, there are not as many USDA loans out there due to where city limits are drawn.
5. What’s better: pay Private Mortgage Insurance (PMI) or save my cash?
Now, this really comes down to a personal decision, but if you have enough money in the bank and can afford to put 20% down and have cash in the bank for emergency fund plus, then we’d say put 20% down and skip the insurance. But if it’s too tight for you, don’t overthink it. The private mortgage insurance, when you put 15% down or even 10% down, is very reasonable.
6. What is the connection between the down payment and the Loan-to-Value (LTV)?
Loan-to-value is a ratio between the amount put you down to the total value. So, if you’re putting 20% down that means you have an 80% loan-to-value. If you’re putting 10% down for down payment, you have a 90% loan-to-value.
7. If the appraised value of a home exceeds the sale price can the difference be applied to the down payment?
Unfortunately, not. It doesn’t really matter what your home appraises for. If your home appraises for a million dollars and someone sells to you for $500,000, the bank uses the lower amount as a benchmark for value. So, the down payment is going to be a percentage of the sale price. It doesn’t matter what it appraises for. All the appraisal does is help you sleep really well at night if it comes in high.
When you go to refinance, that’s when the appraised value really helps you and you can take full advantage of that new value with that lower LTV.
8. Can a home seller contribute to the buyer’s down payment?
No, a seller cannot contribute. The only person who can contribute in the form of a gift is going to be a relative. That being said, the seller can contribute money to the buyer, but only toward the closing costs, prepaid taxes, insurance, and interest on the purchase.
9. Is it wise to withdraw funds from a 401K to make a down payment?
We’d say never touch your 401(k) except when it comes to a home and only if you must. The purpose of a 401(k) is for retirement. In certain cases, you might want to use a portion of it, but we wouldn’t suggest using the whole thing.
10. Can the lender contribute to the buyer’s down payment in exchange for a higher interest rate?
No, they cannot. The lender is very similar to the seller in the sense that they cannot contribute money toward the down payment. However, we can raise the interest rate and create a credit that is applied toward closing costs and pre-paid taxes and homeowner’s insurance and interest.
If you have any other questions or there’s anything we didn’t cover, give us a call. We’re always happy to help. There’s always lots of layers to financing and we know how to get over any hurdle with as much ease as possible.
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Signature Home Loans, LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisory before engaging in any transaction. Signature Home Loans, NMLS 1007154. NMLS# 210917 and 1618695, equal housing lender.