Many buyers inquire about the rules for getting gifts or assistance or seller concessions when qualifying for a mortgage. There are three types of mortgages: 1)conventional mortgages; 2)FHA mortgages which are insured by federal government and 3)VA mortgages which are guaranteed by federal government.
The down payment requirements are different for each mortgage. Buyers must put a minimum 3.5% down for an FHA loan and 5% down for a conventional mortgage. Veterans who qualify for a VA loan can finance 100% of the sales price and are not required to put money down. All three types of mortgages permit the seller to pay a portion of buyer’s closing costs and prepaid expenses ranging from 3% to 6% of the sales price. Borrowers must have the down payment in bank at time of application.
An FHA mortgage permits borrowers to receive a gift for all or part of the 3.5% down payment. The gift must be documented in writing, and the lender may require proof of deposit and copy of cancelled check. The letter must state the proceeds are a gift for the subject property and gift funds are not required to be paid back. If a borrower can obtain a gift letter for down payment, it is possible to purchase a home with little to no money down. The seller can pay up to 6% of the sales price and apply the concession towards buyer’s closing costs and prepaid expenses.
Gift rules are different for a conventional loan. A borrower must put their own 5% down, and the down payment must be immediately available in a bank account or asset account. A borrower can receive a gift from a family member. However, the gift proceeds can only be used as additional down payment or to pay closing costs and pre-paid expenses. The borrower’s 5% down payment (not gift) should be seasoned in a bank account for at least two months.
A borrower may also request the seller to pay a portion of their closing costs and prepaid expenses. For borrowers putting 5% down and obtaining a 95LTV (loan to value) mortgage, the seller can pay up to 3% of sales price and apply towards buyer’s closing costs. The allowable seller concession increases to 6% of the sales price if borrower puts at least 10% down.
Unlike an FHA or VA mortgage, borrowers must also have 3-6 months reserves available after paying down payment, closing costs, and prepaid expenses to qualify for a conventional mortgage. For example, if the mortgage payment is $1,500 per month, the borrower must have a minimum of $4,500 available in cash reserves. Lenders will allow a borrower to use a retirement account or 401K for reserves when obtaining a single mortgage (lien 1- not two liens). However, they will only count about 60%-70% of the vested retirement balance.
If you have any questions about the mortgage or home buying process, please call us at 512-257-9836. We have a team of experts ready to assist you.