No to Low Down Payment Options
In the last article we talked about credit and today we are providing solutions to the # 2 roadblock mentioned for first time buyers. This article explains solutions of low down payment options for buyers that have no or little money for down payment or reserves.
To solve this popular issue, let’s talk today about:
* No to Low Down Payment Mortgage Loan Options
* Saving for down payment & a rainy day fund (lenders call this reserves)
First of all, homebuyers will have more options with money in the bank. Down payment funds help borrowers qualify easier, have more loan options, and have a lower mortgage payment. So the good news is that we have down payment ideas to aid your purchase. In addition, we will discuss the low down payment options available to overcome this obstacle.
No to Low Down Payment Options to Purchase a New Home:
- No down payment mortgage programs. VA and USDA do not require a down payment but buyers will more easily qualify for the loan with assets in the bank or retirement accounts. Lenders and automated approval systems love to see assets. Therefore buyers which have funds left over after closing have a greater chance of loan approval. Assets left over after a closing are called reserves. Reserves can include checking, savings, vested retirement balances, insurance cash value, stocks, and bonds. Basically, reserves are a rainy day fund to pay the mortgage payment and other bills if times get tough. Plus it should just make the buyer feel more comfortable to have a cushion.
- Low down payment mortgage programs: FHA requires only 3.5% down payment. Additionally, there are even Down Payment Assistance programs that will help defray the down payment required by FHA. There are also conventional mortgage programs that allow 3 – 5% down payment. As mentioned above, in addition to the down payment, assets in reserve will help buyers look more qualified to a mortgage lender.
Solutions to Obtain Funds for These Low Down Payment Options
- Gift Funds are allowed as down payment for mortgage programs. Gift funds are an allowable source of down payment on most mortgage programs. Read more about gifts in the article, “When is a Gift a Gift According to FHA?“
- Down Payment Assistance Programs: Sometimes the low down payment options are not enough. A buyer may need help obtaining funds for closing. In NC and SC, there are some awesome down payment assistance programs. These assist first time or move up buyers which need help in bringing funds to closing. The benefits include an interest free, no payment 2nd mortgage up to 3 – 5% of the first mortgage amount. Learn more about Down Payment Assistance
- Take up to a Year to Save up Funds for Down Payment. At first glance, a down payment can be a daunting figure. But some lifestyle changes will help to find a large amount of cash that can be used for down payment. Check out our article Simple Tips for Homebuyers to Easily Save for a Down Payment in a Year!
- Use tax refunds for down payment. Instead of using tax refunds to purchase a TV or other reflex purchases, use it for a down payment. Sometimes a tax refund will even cover the whole down payment! So next tax season, move that money into a savings account. A tax refund coupled with the other lifestyle changes will pay off major dividends in the future.
Rule of Thumb for How a Mortgage Lender Will Look at Bank Accounts:
- The more reserves in the bank, the stronger the borrower. As a rule of thumb, it helps to have a minimum of 2 months of the total expected mortgage payment in the bank. 2 months of reserves is not always required though, but it helps. 6 months of reserves is better of course and the more the better. One can never have too much in reserves. One tidbit of information is that USDA will not lend to a buyer that has 20% of the purchase price in a liquid account, believe it or not.
- NSF’s and overdrafts cause issues. Lenders don’t like to see NSF’s or overdrafts in bank accounts. A pattern of NSF’s can be an indicator of troubled finances. So it is paramount to keep accounts in positive territory at all times. Rather than use an overdraft line, it is best to have extra funds in a savings account. This will avoid fees and penalties.
- Don’t deposit cash into bank accounts when applying for a mortgage. Lenders don’t like to see cash deposits because it usually can’t be proven where the funds came from. Learn more details by reading “Do Not Use Cash When Purchasing a Home and Applying for a Mortgage!“
- Gifts funds must be documented. The best practice is to consult with the loan officer before transferring the gift funds. There are important steps to document gift funds. Read how gift funds must be documented during a mortgage loan process.
We hope that you enjoyed this second article in our homebuyer series. Now there should be a multitude of ideas flowing about low down payment options and solutions.