Down Payment Options

As a First Time Home Buyer you have several loan program options when it comes to financing your home purchase. The two most popular options are either a Conventional loan or a FHA loan and both offer programs with a low down payment option. Even with a 580 or higher credit score.

The idea of the traditional 20% down payment for a First Time Home Buyer went away years ago as home prices moved higher in the early 2000’s.  Even after home prices declined after 2008 it was still very difficult for First Time Home Buyers to come up with the traditional 20% in most urban cities. Things have changed in recent years and currently there are many different options for first time home buyers when it comes to down payments including gift’s from family members, local city or county assistance and in some cases there are gifts of equity.

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FHA Loan Program – Down Payment Options:

The FHA home loan program is probably one of the more popular loan programs with First Time Home Buyers. The reason is that the program allows for a low down payment even if your credit is less than perfect. Other loan programs require better credit scores.

Minimum Down Payment:

The minimum down payment for a FHA loan is 3.5% of the purchase price. In some California counties the FHA loan limit is $765,600 but for the most part the loan limit for most counties is $331,760. So if you purchase a home for $343,792 you could put down 3.5% ($12,032) and your loan amount would be $331,759. Even if you had a 580 credit score.

However there is one issue for those with a credit score below 620.

Even though FHA allows for sub 620 credit scores some lenders won’t go below a 620 credit score. The rate of foreclosure is much higher for those below a 620 and some lenders find it too risk for them. If you think your credit score is below a 620 make sure you tell that to the Loan Officer so that he or she can advise what their current guidelines are for loans with a credit score below 620.

Mortgage Insurance:

The 3.5% down loan program does has a Mortgage Insurance (MI) policy which is added to the actual mortgage payment made each month. This insurance is paid by the homeowner to the mortgage company each month in case you default on the mortgage. It does not cover damage to your home; that insurance policy is called your Homeowner’s Insurance (which covers damages to the home).

Impounds:

The FHA loan program requires you impound your property taxes and your property insurance with your monthly mortgage payment. This is also commonly referred to as “escrows”. It’s actually a great way to have these two items taken care of rather than having to come up with a lump sum every year.

When you close your loan an amount will be places into an escrow account and each month you’ll pay into that escrow account. When your property taxes are due the payment will come from that account. When your homeowners insurance is due the payment for that will come out of the escrow account.

Having an impound account is required; there is no way to get an exception on that.

Gift Funds For Your Down Payment:

You may not have the funds for a down payment but maybe a relative is able to provide the 3.5% down payment. If so then you are good to go with the 3.5% down payment loan program from FHA. The key here is that the person giving the gift mush be a close relative (mother, father, sibling etc) and they must sign a letter saying the funds are a gift and that they do not expect any payment in return.

Local City or County Assistance:

The FHA loan program does allow for certain types of local or county assistance. Usually it’s in the form of a grant and the gift comes with certain requirements. Check with your local and county government to see what options they have.

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Conventional Loan – Down Payment Options:

Conventional loans are another way for First Time Homebuyers to purchase a property with very little down. If you have a strong credit history this might be the better option for you. If your credit is less than perfect you might find the program is not a good fir for you.

Minimum Down Payment:

Would you be surprised if I told you that you could put less than 3.5% down with a Conventional loan program?

It’s true; Conventional loans only require a 3.00% down payment….but there’s a catch. You must have good to excellent credit and in some cases you may need to show some liquid assets as cash reserves. While the program does offer a lower down payment options it does come with tighter underwriting guidelines.

Private Mortgage Insurance:

Like it’s FHA counter part, Conventional loans that have an 80.01%  or higher Loan To Value ratio (meaning you are borrowing more than 80% of the value of the property) come with Private Mortgage Insurance (PMI). What is different is that PMI is usually lower than MI. So if you do qualify for a Conventional loan as a First Time Home Buyer than you not only can put less down but you’ll also save on your monthly Mortgage Insurance expenses.

One more thing; you can get rid of PMI once there is enough equity in the home. That is not something you can do with the FHA home loan program. If you want to get rid of FHA Mortgage Insurance you need to either sell the home or refinance into a Conventional loan program.

Gift Funds For Your Down Payment:

The gift fund option is available to those securing a Conventional loan and for the most part it works the same way. A close relative provides the funds for the down payment and signs a letter saying the funds are a gift and that they do not expect any payment in return.

Local City or County Assistance:

Conventional loans also offer this option and if you can locate a source for this I’d suggest you look further into it. With some of these programs it’s a lengthy process to get approved so it’s important to get your application in as soon as possible.

As you can see there are lots of options to home buyers when it comes to the different down payment options. Be sure to discuss these options with your Loan Officer so he or she can help answer any questions you may have.

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About Loan Officer Kevin O'Connor

About Loan Officer Kevin O'Connor

He is the founder and main contributor of koloans.com. He has over 15 years of experience as a Mortgage Loan Originator (MLO) and is a fully licensed with the state of California and the Nationwide Mortgage Licensing System (NMLS). He has a top rating with the Better Business Bureau and a top rating with Zillow. He continually delivers the results homeowners are looking for; low rates, fast closings and exceptional service: "Helping Homeowners Achieve Their Dreams"  CA DRE #01499872 and NMLS # 247447