Up-Front Cash Requirements
The savings and cash you currently have available can be used to support your up-front payments such as the closing costs and down payment for your home. Consider what savings and cash you will have left after paying your up-front costs to support non-housing-related expenses and emergencies (i.e. unexpected car repairs, credit card payments, car loans). Most lenders prefer that homeowners have three months of living expenses available after closing on the loan.
The up-front cash requirements include:
- Closing Costs -- You need to pay these up-front costs when you close on your home. Closing costs generally depend on the location of the house and the type of loan program. There are opportunities to negotiate closing cost expenses with the seller and lender. Furthermore, there are opportunities to finance some portion of the closing costs as part of the loan amount.
- Down Payment -- This percentage of the sales price must be paid up-front and can vary by lender, location, and loan program. A higher down payment generally translates into lower loan interest rate requirements. While conventional loan down payments may be close to 20% of the sales price, government loans typically have lower down payment requirements. This allows potential homebuyers who normally can not meet down payment requirements an opportunity to qualify for a mortgage. Keep in mind that down payments less than 20% of the sales price typically require mortgage insurance payments.
Example: With an annual income of $45,000 and monthly debt totaling $400, this homebuyer may qualify for different loan programs based on a 30-year fixed rate loan with an interest rate of 6.25%. (The results below are a rough estimate and do not reflect all factors included in the loan qualification calculation.)
| FHA | VA | Conventional | |
| Home Sale Price | $136,737 | $138,979 | $145.766 |
| Down Payment | $4,102 | $0 | $21,865 |
| Cash Required | $5,458 | $5,542 | $27,113 |
| Total Monthly Payment | $1,089 | $1,087 | $1,025 |
These results show that the homebuyer can qualify for approximately the same home price for either an FHA or conventional loan. However, there's a big difference in down payment and up-front cash requirements for government loans versus conventional loans. The down payment requirement for the FHA loan is $2,858 out of a $125,400, approximately 3% of the maximum loan amount. To purchase approximately the same house price using a conventional loan, the down payment requirements would total $12,503, an additional $9645. This is about 10% of the maximum conventional loan amount. If the homebuyer is a veteran, with the same income, the veteran could qualify for a higher home price with no down payment.
Allowable Sources for Down Payment
Most people don't have much money to put toward down payment costs for a home. There are possible solutions to a common cash problem:
- Co-Borrower - Income or additional funds from a spouse may provide additional funds to support the down payment costs. You may also want to consider whether a roommate or co-dweller may relieve the financial burden
- Gifts - Monetary gifts from family members can support your down payment requirements since no funds repayment is required
- Inheritance/Trust Funds - Inherited money from family members or a trust fund are also acceptable sources of down payment since no funds repayment is required
- Borrowing/Loan - Monetary support from friends or relatives can be another solution
- Retirement Funds - Some retirement funds like the 401K plans may allow you to borrow a certain percentage from your retirement fund. You should check with your local lenders to see if they allow homebuyers to borrow against their retirement funds. Note: Borrowing against your 401K plan requires that you repay the amount; therefore, when lenders calculate your loan qualifications, they will add your 401K repayments in calculating your monthly payments
Down Payment Assistance Programs
There are also programs and organizations that can help you with your down payment requirements:
- Federal Government Loan Programs - Federal Housing Adminstration (FHA) and the Department of Veteran Affairs (VA) may offer assistance in paying your up-front cash requirements. These programs can significantly reduce your down payment requirements. You may also want to contact your local Department of Housing and Urban Development (HUD) Community Builders to find out what local downpayment assistance programs are available.
- State Housing Authorities - State agencies may offer down payment assistance programs in your state.
- Private Mortgage Insurance - Private insurance companies that offer you opportunity to finance some of your down payment requirements. This allows lenders to accept lower down payments than they would normally allow.
