Myths on Money Down
According to the Urban Institute, a nonprofit research organization, 66% of its study respondents believe they need to put more than 20% down for a mortgage. That means 66% of them are wrong!
If you are buying a primary residence (a house you intend to live in), then all you need is 5% down for a conventional loan and only 3.5% down for an FHA loan. There are even 3% down conventional loans available for first-time home buyers and for other buyers who meet certain income guidelines. VA loans don’t require any money down at all. And CHFA (Colorado Housing and Finance Authority) offers down payment assistance loan programs that require as little as $1,000 from the buyer.
Where Does the Money Come From?
Many people also wonder if the down payment money must come from their own checking or savings account. The answer to that is no. The money can come from any account that the buyer has, including checking, savings, investment accounts, and retirement accounts. It’s always best to talk to a lender before moving money from one account to another, though, because there are specific rules about how lenders need to document the flow of the money between accounts. These rules are in place because lenders need to verify that the money is actually yours, and not a loan from someone else that has to be paid back.
There is one exception to the rule about down payment money being yours, however, and that is when the money is a gift from a relative. As long as your relative is willing to sign a letter stating that the gift does not have to be paid back, you are allowed to use gifts from relatives for the down payment and closing costs for most types of loans. As the price of houses goes higher and higher, gifts from relatives are becoming increasingly popular as the source of funds for down payments.
If you are buying a second home (a house that you intend to live in some of the time, but not rent to someone else), you will need 10% down.
If you are buying an investment property (a house you will rent to someone else), you will need 20% down.
Down Payment Requirements:
Here is a quick reference for down payment requirements.
DOWN PAYMENT FOR CONVENTIONAL LOANS
- Primary residence = 5% down (sometimes only 3% down, depending on the property address and the buyer’s income)
- Second home = 10% down
- Investment property = 20% down
DOWN PAYMENT FOR FHA LOANS
- Primary residences only = 3.5% down
DOWN PAYMENT FOR VA LOANS
- Primary residences only = 0% down (no down payment required)
DOWN PAYMENT FOR CHFA LOANS
- Primary residences only = $1,000 down