The minimum down payment for most mortgage loans is 3.5%. But 20% is recommended in order to keep interest rates low and avoid paying an additional monthly fee for private mortgage insurance (PMI). This is separate from the typical loan closing costs and must be paid up front.
The U.S. Federal Housing Administration (FHA) has a list of acceptable sources from which you can pull funds for a down payment. The most common are:
- Cash from savings and checking accounts
- Cash saved at home
- Private savings club
- Savings bonds
- IRAs and 401K accounts
- Gift funds
- Money from the sale of personal property
Keep in mind that wherever you source your down payment funds from is subject to scrutiny. And you will need to provide documentation on the source and nature of your down payment funds.
What if I don’t have enough funds for a down payment?
If (like a lot of first-time home buyers and newbie borrowers) you don’t have enough funds on hand to satisfy the loan’s down payment requirement, relax.
You have options:
- Option 1 - Old Fashioned Savings: Postpone your mortgage loan and/or new home purchase a bit to give yourself time to save up enough money for a sizable down payment. Calculate how much you need and deposit money out of your paycheck or checking account into your savings account every month. You could also try to spend less (have “staycations” and eat out less, for example). But we understand that simply waiting and saving is not a viable option for everyone.
- Option 2 - Ask for Lender Credits: Very basically, lender credits act as a trade-off between you and the lender, where you agree to pay a higher interest rate in return for less or no closing costs. The money you would’ve paid towards closing costs can then be used as part of your down payment. You could also try asking the home’s seller if they’d be willing to give you the down payment as credit in exchange for purchasing the home at or above their asking price.
- Option 3 - Look into Government Loan Programs: There are plenty of federal and state-level down payment and loan assistance programs. California, for instance, offers first-time homebuyers with deferred-payment options. If you’ve served in the Armed Forces you might qualify for a VA loan. And if you’re a healthcare worker, you can take out an USDA loan with no down payment required.
- Option 4 - Borrow from Relatives: The U.S. The Department of Housing and Urban Development (HUD) has strict guidelines about what constitutes a gift. But under federal tax law, each parent can gift you up to $15,000 per year without incurring any tax consequences (twice that if you are married). Other relatives could also help with paying your down payment. But depending on the amount you are asking for, you may need to pay additional taxes and you should definitely plan to pay them back in the future with interest.
- Option 5 - Ask a Loan Officer: Loan officers possess a deep understanding of banking industry regulations and loan documentation. They are your direct point of contact throughout the loan application process. If you’re unsure about how much a down payment will cost, or where you should source down payment funds, your loan officer is a great resource.
Avoid the down payment issue entirely by planning and saving before you start seriously shopping for a mortgage loan. Having cash for a down payment is not going to solve every loan problem, but it is a weight off your shoulders.