The required down payment to obtain a mortgage will depend on the type of mortgage being obtained. While there are many different types of mortgages, there are 3 types that dominate the market for mortgagtes under one million. For these three categories of mortgages the minimum down payment are as follows:
- VA mortgages require a minimum down payment of 0%.
- FHA mortgages require a minimum down payment of 3.5%.
- Conventional mortgages require a minimum down payment of 3%
A major challenge for today’s homebuyer is saving enough money for the down payment and closing costs. In addition to the mortgage programs mentioned above, there are programs that provide down payment assistance with as little as 0% down payment in certain situations. Down payment assistance programs will generally have higher interest rates and will have specific qualification criteria depending on the program and the location of the property. While it is possible to obtain a mortgage with a zero-down payment, or low-down payment, for many it is advisable to have a down payment of at least 3% in order to obtian a lower interest rate and more affordable monthly payments.
GIFT FUNDS
One option available to home buyers is to receive a gift for the down payment from an eligible donor. VA, FHA and Conventional mortgages have specific requirements for what constitutes a gift, what the gift funds can be used for, who can contribute a gift and what is involved in documenting gift funds.
Under mortgage guidelines, a gift is money given to a borrower by a family member or other eligible donor to help with their down payment or closing costs. These funds are not a loan that must be repaid. Gift funds fall into 3 main categories:
- Personal gifts.
- Gifts of equity, which are given by the seller of a property to the buyer (often a parent or other relative). The gift is a portion of the seller’s equity in the property.
- Grants, which are often non-repayable funds provided by organizations and programs that target specific groups, such as first-time buyers or individuals with moderate-to-low incomes
Depending on the mortgage program, eligible donors include
- An individual who is related to the borrower by blood, marriage, adoption, or legal guardianship
- A non-relative that shares a familial relationship with the borrower, such as a domestic partner or a fiancé
- The estate of a related person
- A relative of a domestic partner, a godparent or a former relative
Generally, gift funds are allowed for mortgages that involve a primary residence or a second home but are not allowed for an investment property transaction.
To document a gift, a gift letter is required that must:
- Specify the actual or the maximum dollar amount of the gift
- Include a statement that no repayment is expected
- Indicate the donor’s name, address, telephone number and relationship to the borrower (no form of verification of relationship is required).
RETIREMENT ACCOUNTS
Some people choose to withdraw/borrow funds from their 401k, IRA or certain other retirement accounts. In certain cases these funds can be used withoug incurring a tax liability or a penalty. The use of retirment accounts, and the impact of mortgage and tax rules regarding the use of retirmeent funds take careful planning in consultaiton with mortgage and tax professionals.
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For additional information on how to take advantage of the gift rules contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.
