What qualifies as a “good mortgage rate” is in the eye of the beholder. But certain types of home loans offer better interest rates than others. And there are steps you can take to nab a lower mortgage rate in today’s market.

Check your mortgage rates. Start here (Sep 16th, 2024)

Which mortgage types have the lowest interest rates?

Typically, 15-year fixed-rate mortgages offer lower interest rates than 30-year mortgages. Adjustable-rate mortgages are also typically a better deal than 30-year rates, at least in the short term.

Federal Housing Administration (FHA) and Veteran Affairs (VA) loans offer more attractive rates. The average rate of a 30-year fixed-rate FHA loan was 6.41% on December 28, 2023, according to the Federal Reserve Bank of St. Louis. The average 30-year fixed-rate VA loan measured 6.12% that day.

USDA loans — government-sponsored mortgages provided by the U.S. Department of Agriculture — are for borrowers purchasing homes in rural areas. They offer interest rates as low as 4.25% for low- and very low-income borrowers, according to USDA.gov.

Current mortgage rates

The interest rates reported below are from a weekly survey of 100+ lenders by Freddie Mac PMMS. These average rates are intended to give you a snapshot of overall market trends and may not reflect specific rates available for you.

Copyright 2024 Freddie Mac. Averages are based on conforming mortgages with 20% down.

What determines your mortgage rate?

Several factors affect what mortgage rate you can qualify for:

• Market conditions. Mortgage rates track with shifts in 10-year Treasury note yields — and those yields are partly influenced by changes in the Federal Reserve’s benchmark interest rate. A higher benchmark rate means higher borrowing costs for mortgages.
• Your finances. Mortgage lenders take several key factors into account when assessing a borrower’s application. Your credit score, loan amount, down payment, and debt-to-income ratio can all impact the rate that you qualify for.
• Mortgage lender. Rates can vary by lender, which is why it’s a good idea to shop around. Proof: Nearly half of borrowers who compared offers said the first mortgage offer they received was not the lowest rate, a recent LendingTree survey found.
• Loan type. As outlined above, the type of loan you get affects your mortgage rate.
• Loan term. Shorter-term loans typically offer lower mortgage rates. (At the same time, they also have higher monthly mortgage payments.)

Check your mortgage rates. Start here (Sep 16th, 2024)

When should you consider an ARM mortgage?

An adjustable-rate mortgage is a loan that offers a low-interest rate for a set number of years, typically anywhere from 3, 5, 7, or 10 years. When that period ends, the interest rate adjusts, usually once per year, based on market conditions — though in most cases, “adjusts” means the rate increases.

Whether an ARM makes sense for you often depends on your financial circumstances and your plans for the home.

An ARM might be a good option if:

• You plan to sell the home early
• You will be receiving a windfall
• You plan to retire soon

Read more: When does an ARM make sense?

9 tips to get a lower interest rate on your mortgage

1. Check your eligibility for a VA, FHA, or USDA loan

Because VA, FHA, and USDA loans are government-backed, and therefore somewhat less risky for lenders, they often offer lower interest rates than conventional loans.

VA loans are for active or retired military veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves (or a veteran’s surviving spouse).

FHA loans are intended to help low- and moderate-income borrowers purchase homes. They are particularly popular with first-time home buyers.

USDA loans are for people purchasing a home in an eligible rural area, which the Department of Agriculture typically defines as a population of less than 20,000. To qualify, you can’t make more than 115% of the area median income.

2. Consider an ARM

An adjustable-rate mortgage has a lower interest rate than a fixed-rate loan — and, as a result, a lower mortgage payment — for a predetermined initial period. To be eligible for a conventional ARM, you typically must have at least a 5% down payment, a credit score of 620 or higher, a debt-to-income ratio of no more than 50%, and a loan-to-value ratio of no more than 95%.

An ARM isn’t right for everyone, but it could be a good fit if you’re a first-time buyer purchasing a starter home that you know you’re going to sell before the introductory rate ends, flipping a house, or feel comfortable with potentially absorbing higher rates and higher mortgage payments in the future.

3. Shop around

Mortgage rate offers can vary from one lender to the next. So, obtain multiple quotes before choosing a lender. According to a Freddie Mac study, borrowers save an average of $3,000 over the life of their loan by getting five quotes instead of just one.

4. Improve your credit score

Typically, the higher your credit score, the lower your mortgage interest rate. Generally, an excellent credit score is anything from 750 to 850; a good credit score is from 700 to 749; a fair credit score is from 650 to 699; and any credit score lower than 650 is deemed poor.

If your credit history has some black marks, taking steps to raise your credit score can help you qualify for a better rate. Reviewing your credit reports for errors and paying down credit card debts are good places to start.

5. Choose your loan term carefully

A 15-year fixed-rate mortgage offers a lower mortgage rate than a 30-year fixed-rate mortgage, but take a close look at your finances to make sure you’d be comfortable taking on the higher monthly mortgage payments that come with a shorter-term loan.

6. Make a larger down payment

Jumbo loans — mortgages that exceed the loan limit of conforming loans set by Freddie Mac and Fannie Mae — typically have higher interest rates. Therefore, making a larger down payment could potentially lower your mortgage rate if it enables you to qualify for a conforming loan instead of a jumbo loan.

In 2023, the conforming loan limit in most areas of the country is $726,200, with some high-cost areas allowing for conforming loans as high as $1,089,300.

7. Buy mortgage points

Mortgage points, also known as discount points, are extra funds paid upfront at closing. Purchasing them can lower your loan’s interest rate and, as a result, reduce your housing payments. Generally, one point costs 1% of your loan amount (so, one point on a $300,000 mortgage would cost $3,000), and each point trims your interest rate by a small amount, typically 0.25 percent per point.

Under the right circumstances, discount points can help you save money over the life of the loan.

8. Get a rate lock

If you’ve been pre-approved for a loan and qualified for a good interest rate, getting a mortgage rate lock would allow you to lock in that low rate for a set period of time — typically 30, 45, or 60 days, protecting you from rate hikes in the near term.

Most lenders offer borrowers free 60-day rate locks upon request; longer rate locks typically cost money, usually a few hundred dollars.

9. Negotiate with lenders

Some lenders may be willing to offer a lower mortgage rate, especially if you’ve received competitive offers from a few different lenders. This is part of the reason that it’s important to shop around for the best rate.

Pro tip: If you can’t get a lender to budge on the interest rate, see if they’re willing to reduce certain closing costs, such as title insurance, loan origination, or underwriting fees.

Low-rate mortgages FAQ

What type of mortgage has the lowest interest rate?

VA loans typically have the lowest interest rates, narrowly beating FHA loans. But only active or retired military veterans (or a surviving spouse) are eligible for VA mortgages.

How can I get a 3% mortgage rate?

Sorry to be the bearer of bad news, but 3% mortgage rates are no longer available (at least for now). That’s because mortgage rates more than doubled in 2022, with the average rate for a 30-year fixed-rate mortgage closing out the year at 6.42%.

How are ARMs calculated?

To set ARM interest rates, lenders determine the loan’s fully indexed rate — the highest possible interest rate that you’d pay when your ARM’s introductory rate period ends. This figure is calculated by adding the index (whatever that happens to be when your initial rate expires) and a margin (usually 1.75% for Fannie Mae or Freddie Mac loans).

How does an adjustable-rate mortgage work?

An ARM offers a lower interest rate for a set number of years, typically anywhere from 3, 5, 7, or 10 years. When that introductory period ends, the interest rate adjusts, usually once per year, based on market conditions.

Are adjustable-rate mortgages ever a good idea?

ARMs got a bad rap because of their contribution to the housing crash of 2008 and 2009, but they’re not necessarily a bad product — and lenders have tightened their requirements of ARM borrowers, making adjustable-rate loans safer than they were in the past. An ARM could be a good way to save money if you know that you’re going to sell your prospective home before the introductory rate expires.

How do you shop for mortgage rates?

You can shop for mortgage rates by reaching out to lenders on your own to obtain loan estimates, or you can use a mortgage broker, a professional who can shop for mortgage offers on your behalf.

Is it better to have a lower interest rate or APR?

Generally, it’s better to score a lower APR than a lower interest rate. Why? Because APR — short for annual percentage rate — is the annual cost of a loan to a borrower, including the interest rates and fees. That means APR gives you a fuller snapshot of your mortgage costs. Comparing APR offers is relatively easy since the Federal Truth in Lending Act requires lenders to disclose a borrower’s APR in every consumer loan agreement.

The bottom line: Low-rate mortgages

Though mortgage rates have increased in recent months, borrowers can still save on their mortgage loans by making sure they’re getting the lowest possible interest rate.

Check your mortgage rates. Start here (Sep 16th, 2024)

The post Low Rate Mortgages | 2024 first appeared on My Mortgage Insider.

There are plenty of good reasons for unmarried people to buy a house today, but buying a house outside of marriage can come with big risks. Unless you know how to avoid the potential pitfalls, locking in on a home with your unwed partner could be a costly mistake.

Check your home buying eligibility here (Sep 16th, 2024)

Getting your finances in order with your partner

Before you and your partner begin househunting, exchange personal finance information, including salaries, debt, and credit scores.

Not only will this information help you estimate how much house you can afford, but it will help to determine how much money each person can contribute to the down payment, closing costs, and monthly mortgage payments.

You also need to know upfront if your boyfriend or girlfriend has a low credit score.

If one applicant has a bad credit score, it may reduce the amount banks will lend and will also lead to less favorable rates and terms.

Also keep in mind that if your partner ever stops contributing to the mortgage, you’ll be liable as a co-signer to pay for the whole thing.

So not only is it good to know your significant other’s financial status to gauge how much home you can buy, it also makes sense to get a mortgage that you could pay off yourself if it comes to that.

Check your home buying eligibility here (Sep 16th, 2024)

Deciding how to “take title”

Once you and your partner create a budget and decide how to split the costs of buying and maintaining the house, consider how you will own the home, or “take title.”

Here are the three basic options:

1. One person can hold the title as sole owner
2. Both people can hold title as “joint tenants”
3. Both of you can share title as “tenants in common”

You might be tempted to pay scant attention to this issue, but that could be a very expensive blunder.

Even if your relationship stands the test of time and you never break up, consider what would happen if one of you died. What would happen to the house and your investment?

The answers to those questions hinge on the ownership arrangement. If you aren’t careful, you could find yourself losing your home – even if you contributed thousands of dollars to the mortgage and other expenses.

Sole ownership

On its face, this seems like a bad option for unmarried couples — and it usually is.

If your partner’s name is the only one on the deed, he or she is the only legal owner. This means that your partner can sell the house (or bequeath it to someone else), and there’s nothing you can do about it.

Why take this route?

Often, it’s done when one partner’s credit is so bad that the couple would never qualify for a mortgage. Sometimes, a higher-income partner simply wants all the house-related tax deductions.

Fortunately, one person can take the title as sole owner and later add the other partner’s name to the deed. But before you do this, consult an experienced real estate lawyer. Officially adding the other partner’s name to the deed might allow your mortgage lender to call in the loan, and in some areas, you may have to pay transfer taxes and fees to add a name to the deed.

Joint tenancy

This arrangement is suitable when partners own equal shares of the house. (If the partners own unequal shares — 60/40 or 70/30, for example — you’ll want to be tenants in common.)

The biggest benefit of joint tenancy is that neither owner can sell the house without the other’s permission.

Also, if one joint tenant dies, the other automatically inherits that person’s share, even if the deceased left a will stating otherwise. This is known as “right of survivorship,” and some states even require that you add the phrase “with right of survivorship” to the agreement.

If one partner decides to sell their share in the house, however, the joint tenancy ends, and the new shareholder and you become tenants in common.

Tenants in common

This is the most common way for unmarried couples to take title. There are two reasons for this:

1. The arrangement allows the partners to own an unequal share of the home.
2. When one person dies, that partner’s share can be left to whomever the person wishes. In other words, the share doesn’t automatically go to the other tenant in common.

If you own unequal shares, though, be sure to “memorialize” the percentages in writing — in a property agreement, partnership document or cohabitation agreement.

Otherwise, the law will usually presume that you have a 50/50 ownership arrangement with your co-owner.

Keep in mind that not all relationships last forever. An ownership arrangement can help you be prepared, in case the relationship ends.

It’s also a great idea to consult with a real estate attorney before signing anything.

Check your home buying eligibility here (Sep 16th, 2024)

Questions to ask before buying a house with your boyfriend or girlfriend

If you want to buy a house with your partner before marriage, there are some questions to ask first. A few important ones include:

• What are the laws? Each state treats this situation differently. Look into the laws for your state to make sure you are comfortable before buying a home with your boyfriend or girlfriend. 

• What documents should you have in place? You’ll likely need to draw up a cohabitation agreement that includes details about who owns what and an exit strategy if it becomes necessary. 

• Who should be on the mortgage? In some cases, it makes sense for one partner to obtain the mortgage due to a better credit score or higher income. If you cannot qualify for a joint mortgage, consider how this would impact your homebuying plans. 

• What happens in a breakup? No one wants to think about this. But it’s important to talk this possibility through. 

• What happens if someone dies? Again, not a pleasant subject. But consider what should happen in this worst-case scenario. 

• How should we split costs? Homeownership comes with plenty of expenses, such as maintenance and property tax. Talk about these costs before the bills start arriving. It might be helpful to set up a joint bank account specifically to cover home-related expenses. 

Credit considerations when buying a house with a boyfriend or girlfriend

If you want to buy a home with your boyfriend or girlfriend, it is important to consider the realities of different credit scores. In some cases, partners with vastly different credit scores could benefit from just one partner applying for the mortgage. A borrower with a good credit score can unlock better mortgage rates and lower the overall expenses for the household. 

If you have similar credit scores, then applying together for the mortgage is an option. But remember that both of your credit scores will be on the line. 

What could go wrong if you buy a house with a boyfriend or girlfriend

Unfortunately, not all relationships last forever. The biggest risk of buying a house with an unmarried partner is the possibility of a breakup — without all of the legal protections that would come into play during a divorce.

Of course, there are horror stories out there. But there are also unmarried couples happily buying homes together that enjoy the experience for the long term. 

What is a cohabitation agreement?

A cohabitation agreement is a contract between two parties that live together but aren’t married. The goal of this kind of agreement is to map out a legal plan for any issues that may come up. With a good cohabitation agreement in place, everyone knows exactly where they stand in terms of financial and legal rights. 

What is typically included in a cohabitation agreement?

A cohabitation agreement often includes details about property division, inheritance, and other estate planning issues. 

As you build this document, it should also consider the financial expectations for each party. For example, it can include which household expenses will be covered by who. 

Of course, it should outline what would happen in the event of a breakup. 

Finally, if buying a home together the cohabitation agreement should consider the type of ownership each partner has. And if you’ve divided up the home’s equity, make sure it is clearly documented who owns which share of the property. 

In many cases, it is worth enlisting the services of a real estate attorney to map out this document. 

Check your home buying eligibility here (Sep 16th, 2024)

Buying a house with a boyfriend or girlfriend FAQ

Should I buy a house with my boyfriend before marriage?

Whether or not you should buy a house with your boyfriend, or buy a house with your girlfriend, varies based on your unique situation. Of course, you’ll both need to be in this partnership for the long term. 

But beyond that, you both need to be willing to work together to navigate the complex home buying process. As a first-time homebuyer, there is a bit of a learning curve to master.

It could be a good idea if you are both ready to jump into this challenge. But if either partner is on the fence about it, then the financial and emotional stress that comes with buying a house might not be worth it. 

What are the risks of buying a house with your significant other before marriage?

The reason that many couples wait until marriage to pursue homeownership is the legal risks tied to buying a house without that marriage certificate in hand. When married, there are certain legal protections in place to keep both of your interests safe if a breakup were to happen. Without a marriage certificate, there are many loopholes for an ex to exploit when deciding what to do with the house. 

In addition to the legal risks, there are emotional risks. Buying a home is a big financial step, but it is also a major life marker. If a breakup happens, the emotional fallout of dividing up the house would be traumatic. 

Can an unmarried couple buy a house together?

Yes, an unmarried couple can buy a house together. But it is important to weigh the risks and rewards before moving forward. 

Can I buy a house with my boyfriend?

Yes, you can absolutely buy a house with your boyfriend. It’s completely legal to buy a home with someone other than a spouse.

Is it smart to buy a house with a boyfriend or girlfriend?

Whether or not it is smart to buy a house with a boyfriend or girlfriend depends on your unique situation. The reality is that tying up your financial assets with someone else before marriage can make things complicated quickly. If you and your partner are ready for that big step, then it can be a smart idea. But if either of you isn’t quite ready for this major step, then it is probably smart to hold off on this major purchase for now. 

How do I protect myself when buying a house with a partner?

If you want to protect yourself financially when buying a house with a partner, the first step is to decide how the title will be held. The options include sole ownership, joint tenancy, tenants in common, or a living trust. 

In most cases, a joint tenancy or tenants in common agreement will protect your interests. But it is a good idea to speak to a real estate attorney to ensure that everything is above board. 

Is it better to buy a house alone or with a partner?

Buying a house with a partner can improve your approval chances for a mortgage. That’s because two incomes often lead to more buying power. But if you are unsure about the future of your relationship, then buying a house alone is likely the better option. 

Can you get a joint mortgage without being married?

Yes, you can get a joint mortgage without being married. Any manner of co-borrowers can choose to apply for a mortgage together. 

Can I get a joint mortgage with my girlfriend or boyfriend?

Yes, you can get a joint mortgage with your girlfriend or boyfriend. When applying together, it is possible that the combined incomes will improve your approval chances. 

What happens if one of us is not on the mortgage?

If your name is not on the mortgage or the title to the home, then you are not the legal owner. Although you may be contributing to the homeownership expenses, the titleholder is the official owner of the home. 

With that, the mortgage holder will keep the home if things go south. 

Can I add my partner’s name to the mortgage after buying the house?

Most lenders will require a refinance if you want to add your partner’s name to the home loan after buying a house. However, you can generally add a partner’s name to the title itself through a QuitClaim deed. 

How will buying a house together before marriage impact your taxes?

As a homeowner, you can deduct mortgage interest from your taxes on up to $750,000 in mortgage debt. If you buy a home before marriage, only one of the homeowners can claim this expense. 

With that, one of you will not be able to take advantage of this tax break offered to homeowners. 

How do I buy a house with my boyfriend or girlfriend if they have worse credit?

If your partner has bad credit, it might be a smart move to apply for the mortgage on your own. A good credit score can unlock better mortgage rates which could lead to thousands saved over the life of your loan. 

But if your boyfriend or girlfriend has a higher income with worse credit, it may be worth applying together anyways. Although the interest rates you get as a couple could be a bit higher, the increased income can help to increase your buying power. 

Check your home buying eligibility here (Sep 16th, 2024)

The post Buying a house with a boyfriend or girlfriend first appeared on My Mortgage Insider.

Nothing could be further from the truth.

The fact is that there have always been and always will be mortgage options for borrowers that don’t have a large down payment.  Here are five loan options for those who have 5 percent or less for a down payment.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

#1: Conventional loans with PMI

Conventional loans are mortgages approved using guidelines established by mortgage giants Fannie Mae and Freddie Mac. Historically, lenders required a down payment of 20 percent. Yet in 1957, private mortgage insurance, or PMI, was introduced.

Mortgage insurance is an insurance policy that repays the lender should the borrower default. The borrower pays for this insurance policy along with their monthly mortgage payment. This extra expense can be well worth it though.

Say a home is sold for $200,000. A 20% down payment is $40,000. That’s quite a lot for new home buyers. A 5 percent down is much more feasibly, at only $10,000. A PMI policy can be purchased at a cost of approximately $150 to $300 per month, depending on credit score. But this option helps bring down the barriers to homeownership significantly.

Check your home buying eligibility. Start here (Sep 16th, 2024)

#2: Federal Housing Administration (FHA) loans

In recent years, FHA has been the standard for first-time home buyers. Although that’s shifting because of increased offerings in conventional lending, they are still very popular.

FHA loans require as little as 3.5% down, a bit less than the conventional requirement. That means on a $200,000 loan, the minimum down payment is just $7,000.

An FHA loan has a monthly mortgage insurance requirement like a conventional loan, but it also has an “upfront mortgage insurance premium,” or MIP. The MIP is 1.75% of the loan amount, or in this example an additional $3,500. However, this upfront premium does not have to be paid out of pocket and can be rolled into the loan amount.

The monthly mortgage insurance premium for an FHA loan is typically 1.35% of the loan amount per year, divided into 12 equal installments and added to the monthly payment. For example, a $200,000 total loan amount would require $225 per month in mortgage insurance.

Although an FHA loan is more expensive than its conventional counterpart, it allows for a lower credit score and offers more lenient income requirements, making it the best program for some home buyers.

Check your eligibility for an FHA loan. Start here (Sep 16th, 2024)

#3: VA loans

This program is a special entitlement offered to active duty personnel and veterans of the U.S. armed forces. The VA loan requires no down payment whatsoever. In addition, there is no monthly mortgage insurance premium, just an upfront premium, usually 2.3% of the loan amount.

The minimal costs associated with this loan make it the clear choice for current and former members of the military.

Those who have served in one of the branches of the military including the National Guard or Reserves could be eligible.

For complete guidelines, see our VA home loan page or contact a VA-approved lender.

Check your VA home loan eligibility. Start here (Sep 16th, 2024)

#4: USDA loans

Sometimes referred to as the Rural Development Loan, the USDA program requires no down payment.  As the name implies, the program is designed to assist borrowers buy and finance a property in rural, less urban areas.

In order to qualify for a USDA loan, the property must first be located in an eligible area. These areas are mapped on the USDA website. This is the first place borrowers should visit to see if a prospective home is eligible. By entering the address on the website, the property’s eligibility will be determined.

Eligible areas are often rural in nature, but surprisingly, many eligible areas are suburbs of bigger metropolitan areas. Even if you don’t think the area in which you’re looking to buy a home is eligible, it’s worth taking a look at the USDA loan map.

You could discover that you’re able to buy a home with zero down payment.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

#5: Fannie Mae HomePath loans

Editor’s note: Fannie Mae ended their HomePath program on October 6, 2014. For more details, visit our Fannie Mae HomePath page.

Fannie Mae has a list of foreclosed properties that it offers for sale on the website HomePath.com. Buyers can look for homes in their area with a simple city or ZIP code search.

Home buyers can purchase these homes with only 5% down. What’s more, buyers receiving a gift from an eligible gift source only need $500 of their own money.

Unlike a standard conventional loan, Fannie Mae HomePath loans don’t require mortgage insurance or an appraisal. Some of the properties may be in need of repair, but they provide a great opportunity, especially for first-time home buyers who have little to put down on a home.

Check your home buying eligibility. Start here (Sep 16th, 2024)

A 5% down payment is all you need

Lenders have realized that it’s unrealistic to require a 20% down payment considering today’s home prices. That’s why many programs are available, even to those with less-than-perfect credit and little money saved.

And current interest rates make it even more affordable to buy a home. Contact a reputable lender to find out which of these programs might work best for you.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

The post 5 Ways to Buy a Home with 5% Down or Less first appeared on My Mortgage Insider.

Below, we’ll dive into the requirements for an FHA loan down payment and the types of down payment assistance available for these loans.

Check your eligibility to buy a home with just 3.5% down (Sep 16th, 2024)

What are the benefits of an FHA loan?

FHA loans are government-backed loans offered by the Federal Housing Administration (FHA).

This loan program offers significant benefits for home buyers including:

• Low down payment
• Flexible credit qualifications
• Relatively low mortgage rates

These benefits make it an excellent loan program for first-time home buyers or those with limited cash reserves.

What is the minimum FHA loan down payment?

Your down payment minimum with an FHA loan will depend on your credit score.

Homebuyers with a credit score of 580 or greater can get an FHA loan with just 3.5% down.

Homebuyers with scores between 500-579 may still qualify for an FHA loan but will likely need to make a larger down payment of 10%.

FHA minimums and private lenders

Keep in mind that while the FHA sets the minimum requirements for this loan program, private mortgage lenders can set their own standards, which may be stricter.

If you’re hoping to qualify with a credit score between 500 and 579, for example, it may be harder to find a willing lender — even though FHA technically allows these credit scores with 10% down. So make sure you shop around and explore your options. Some lenders will be more lenient than others.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

Mortgage insurance requirements for an FHA loan

In addition to the guarantees offered by the FHA, lenders charge mortgage insurance premiums (MIP) to offset the higher risk associated with FHA loans. The borrower pays for this insurance but it’s the FHA lender who gets the payout in the case of mortgage default and foreclosure.

MIP comes in two parts. First, there’s an upfront mortgage insurance premium (UFMIP). UFMIP can be paid at closing but most borrowers roll it into the loan amount to avoid the upfront fee. The cost is usually 1.75% of the loan amount. So this is what a $200,000 home purchase would look like:

• Purchase price: $200,000
• Down payment (3.5%): $7,000
• Loan amount before upfront MIP: $193,000
• Upfront MIP of 1.75%: $3,378
• Total loan amount: $196,378

Secondly, you have to pay a smaller (but still significant) premium each month. Most often, this monthly mortgage insurance is equal to 0.85% of the existing loan balance per year. For that $200,000 home purchase, it will cost about $136 per month, which is added to the monthly mortgage payment.

FHA mortgage insurance premiums (MIP) don’t drop off automatically

Unlike the private mortgage insurance with conventional loans, which drops off after you’ve accrued sufficient home equity, the mortgage insurance premiums on an FHA loan will typically last for the life of the loan.

To get rid of your mortgage insurance payments, you’ll need to refinance to a different loan type — one without mortgage insurance — once your loan-to-value (LTV) is greater than 80%.

The only exception is for FHA borrowers who make a down payment of 10% or more. In this case, your MIP is removed after 11 years.

Down payment gift rules for FHA loans

An added benefit of FHA loans is that they offer less strict rules about down payment gifts than some other types of mortgages, making it that much easier for borrowers to benefit from the help of family or friends.

Some — or even all — of your down payment for your new home can be a gift, as long as:

1. The money is a gift, not a loan in disguise
2. The person giving the money provides a formal gift letter
3. There is a documented paper trail of the money leaving the giver’s account and arriving in yours

The gift can come from a family member, an employer or labor union, a close friend, or a charitable organization. This is a big FHA loan benefit as conventional loans have stricter rules regarding gift funds.

FHA loan down payment assistance programs (DPAs)

There are thousands of down payment assistance programs (DPAs) across the United States. And there’s at least one in every state. Many cities and counties offer their own programs, too.

Every DPA has its own rules. Some give help with closing costs while others don’t. Some help only first-time buyers.

Assuming you qualify, you may be offered a low-interest loan that you pay down in parallel with your main mortgage. You could even be given thousands of dollars in outright grants — meaning you never have to repay a cent.

Low down payment alternatives to FHA loans

There are a number of low down payment loan program alternatives to the FHA loan.

Conventional 97 loan: 3% down

Sometimes known as “Conventional 97” mortgages — because you can borrow up to 97% of the value of the home — these loans require a minimum down payment of just 3%.

That’s lower than the FHA’s 3.5% minimum. So why does anyone opt for an FHA loan?

Well, it’s mostly because of the credit score requirements. Fannie Mae, for instance, insists on a minimum score of 620 for its fixed-rate mortgages (FRMs) and 640 for its adjustable-rate mortgages (ARMs) to qualify for the Conventional 97 program. Some private lenders require even higher scores.

To get the best rates for a Conventional 97, you should have a good credit score above 700.

If you have a good credit score, you might opt for a low-down payment conventional mortgage. This is because you can cancel mortgage insurance when you’ve paid down the loan. FHA requires mortgage insurance for the entirety of the loan term.

Check your home buying eligibility. Start here (Sep 16th, 2024)

HomeReady loan: 3% down

This conventional loan program, intended for moderate-income borrowers, will allow you to buy a home with just 3% down. The HomeReady loan program also has lower private mortgage insurance (PMI) rates compared to a standard conventional loan.

To qualify, you’ll need to earn less than 80% of your area’s median income.

Click here to see if you qualify to buy a home with the HomeReady Mortgage (Sep 16th, 2024)

Home Possible loan: 3% down

Much like a HomeReady loan, this Home Possible loan program can help moderate-income borrowers purchase a home with a down payment of just 3% and reduced PMI premiums.

Check your Home Possible eligibility here (Sep 16th, 2024)

VA loans: 0% down

VA loans are reserved almost exclusively for veterans who meet minimum service levels, and those now serving in the military.

If you’re eligible, your service buys you one of the best mortgages around: zero down payment, low-interest rates, no continuing mortgage insurance, and the option of a VA streamline refinance later.

USDA loans: 0% down

If you want to live in a less densely populated area, you may be eligible for a USDA loan with zero down.

And that’s more likely than you may think: roughly 97% of the American landmass is so designated, including some suburbs.

However, these mortgages are reserved for those with “regular” incomes — up to 115% of the area’s median to be exact. For example, home buyers near Portland, Oregon can make up to $105,950 and still be eligible. There’s a good chance that you’re income-eligible.

You still have to pay some mortgage insurance on a USDA loan, but probably less than you would with an FHA one.

Click here for current USDA rates (Sep 16th, 2024)

FHA loan requirements in 2024

Besides down payment requirements and minimum credit score, what else is needed to qualify for an FHA loan?

FHA loan limits

In most of the US, you can borrow up to $498,257 for a single-family residence with an FHA loan. But that rises to $1,149,825 if you’re buying in an area with high home prices.

The limit may be even higher if you want to purchase a home in Alaska, Hawaii, the US Virgin Islands or Guam — or if you’re buying a residence for multiple families.

To find the loan limits in the place you want to buy, use the look-up tool on the website of the US Department of Housing and Urban Development (HUD).

FHA debt-to-income ratio (DTI)

Alongside your credit score and down payment, the other thing lenders look at closely is your debt-to-income ratio or DTI. That’s the percentage of your pre-tax monthly income that’s taken up by monthly commitments including debt, alimony, and child support. You will also need to add your housing expenses once your new mortgage is in place. Utilities are not taken into account.

FHA guidelines are relatively flexible about your DTI. And it’s possible to get approved with one as high as 50%. However, you’ll likely need to impress in other ways (like a higher credit score or down payment than the minimums) to get that high a ratio approved. More often, FHA lenders prefer a DTI below 45%.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

FHA loan down payment FAQ

What is an FHA loan?

An FHA loan is a government-backed mortgage loan insured by the Federal Housing Administration (FHA) that requires a minimum down payment of 3.5% and has more flexible credit requirements than many other loan options. FHA loans can be used to buy a home, refinance your existing mortgage, or renovate a home.

What is the minimum down payment for an FHA loan?

For borrowers with a credit score of 580 or above, the minimum down payment for an FHA loan is 3.5%. For borrowers with a credit score between 500 and 579, the minimum down payment is 10%.

Does FHA require 3.5% down?

Yes, the FHA requires a minimum down payment of at least 3.5%.

Can you put more than 3.5% down on an FHA loan?

Yes, you can put down more than 3.5% and it may even lead to a lower mortgage rate. Additionally, depending on your credit score, a 10% down payment may be required.

Can you do no down payment with FHA?

FHA home loans do not offer a “zero down” option, however, there are different kinds of down payment assistance available for FHA borrowers. There are both state and regional programs that offer down payment assistance and which may enable a borrower to obtain an FHA loan without using any of their personal funds for the down payment or closing costs.

Can you use a credit card for an FHA down payment?

No, using a credit card is strictly prohibited by the FHA, as credit cards are considered “non-collateralized loans.”

Can you put 20% down on an FHA loan?

The FHA only requires a minimum down payment of 3.5% (or 10%, for lower credit borrowers). However, you can put down as much as you want above and beyond the down payment minimum, and doing so may get you a lower mortgage rate and lower monthly payments.

What happens if I put 20% down on an FHA loan?

A larger down payment on your FHA loan will likely get you a lower mortgage rate and lower monthly payments. But, unlike conventional loans, you’ll still need to pay mortgage insurance, even if you make a down payment of 20% or more. That’s why a conventional loan is often more affordable if you have a large down payment.

Can a down payment be included in an FHA loan?

No, you cannot finance your down payment into your FHA loan. However, there are down payment assistance programs that may help to cover your down payment and closing costs.

Can I get additional down payment assistance with an FHA loan?

The FHA itself does not offer down payment assistance. However, there are a number of down payment assistance programs and grants that can help FHA borrowers.

Is an FHA loan right for you?

An FHA loan might be the right answer if you’re looking for a low down payment loan program with relatively low interest rates and flexible credit requirements.

FHA loans are particularly helpful for:

1. Those who wish to be homeowners but who would otherwise be excluded from mortgage borrowing
2. People with lower credit scores
3. Those with limited savings, especially if they can access down payment assistance or gifts

Check with a lender to learn whether you qualify for an FHA loan today.

​​ Check your FHA eligibility (Sep 16th, 2024)

The post FHA Loan Down Payments | Requirements 2024 first appeared on My Mortgage Insider.

If your family will be helping, your lender will need to know in advance. The lender will need a “gift letter” from the donor to make sure your down payment help has no strings attached.

If you’re planning to buy a house but need help with the down payment, you could ask for down payment gift money.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

In this article:

• Gift funds can help first-time homebuyers get a home
• Using conventional loan gift funds
• FHA loan gift funds
• USDA loan and VA loan gift funds
• Who can give gifts?
• What gifts are unacceptable?
• Sample mortgage gift letter (pdf)
• Gift money documentation
• Alternatives to down payment gift funds
• What is a gift of equity?
• Qualifying for a loan
• Down payment gift funds FAQs
• Our recommended lenders for home loans

Gift funds can help first-time homebuyers get a home

It takes a lot of cash to make a down payment, even with today’s smaller down payment mortgages.

For example, let’s say you’re buying a $350,000 home, which is less than the current median home purchase price in the U.S. That translates into a dollar amount of:

• $10,500 to make a 3% minimum down payment on a conventional loan
• $12,250 to make an FHA loan’s 3.5% down payment
• $17,500 for a 5% down conventional loan

A down payment gift could help you reach this threshold sooner, and buying sooner often means paying less. As years pass, homes tend to get more expensive.

And, don’t forget about the closing costs which could double your upfront cash outlay. Gifted money can help with those costs, too.

How do down payment gifts work?

Down payment gifts seem simple enough: Family members — or friends, in some rare cases — give you money, and you use the money for your down payment, closing costs, or both.

But there are some rules to know about. Following your lender and loan program’s rules will help avoid delays in closing your loan.

Overall, the rules ensure you’re not required to repay the gifted funds. For example, does the donor expect to own part of your home in exchange for the gift? Will the owner want a lien on the property?

The best way to clear up these questions is with a down payment gift letter.

What is a down payment gift letter?

A gift letter, from the donor to the lender, includes the donor’s name, address, and phone number. It also includes the donor’s relationship to the borrower and the amount of the gift.

The letter should state that the gift is intended to help the borrower make a down payment and that the donor has no expectation of repayment.

If your donor isn’t sure how to write a gift letter, that’s OK. The loan officer usually provides a template gift letter for the borrower to provide to the donor. The donor then completes and signs the letter.

Or, you can download an Editable Gift Letter or view a PDF Gift Letter.

Is gift money taxed?

You won’t have to report a down payment gift as income on your tax return. The money won’t be taxed as income.

It’s not quite as simple for donors. The IRS allows each donor to give you up to $17,000, beginning in the 2023 tax year, without paying a gift tax. (In 2022, the maximum was $16,000.) Married couples can give $34,000 ($32,000 in 2022).

Also, donors have a lifetime cap on gift-tax-free donations. Beginning in 2023, that lifetime cap is $12.92 million.

Are there limits on gift amounts?

As long as you and your donor meet your lender’s guidelines, you could use gifted money to cover your entire down payment amount on a primary residence.

In the past, conventional loan gift funds were limited to a certain percentage of the purchase price. But now this happens with some investment property loans.

That said, each loan type does have its own unique requirements, so we’ll discuss those next.

Using conventional loan gift funds

Conventional loans, regulated by Fannie Mae and Freddie Mac, allow the borrower to apply financial gifts to the down payment, fees, and closing costs.

Borrowers usually do not need their own funds when receiving a gift if the gift covers the entire down payment and other loan costs. (In the past, borrowers needed 5% of their own funds.)

Now, according to Fannie Mae, the minimum 5% borrower contribution is only needed when:

• The gift amount is less than 20% of the purchase price, and the property is 2- or 4-unit or a second home
• If the loan amount is over $647,200

How much money can be gifted on a conventional loan?

To clarify, borrowers don’t need to bring their own funds when receiving a gift that covers the entire down payment and closing costs — unless the final loan amount is higher than the annual conforming loan limit. The current loan limit in most counties is $766,550 in 2024.

If the gift amount does not cover all upfront costs, borrowers need to prove they have the money to cover them, or they’ll need to receive a higher gift amount.

You may think it’s unlikely for someone to give away enough money to cover the entire down payment and closing costs. But, it happens more than you might think. Gifted money has allowed many homebuyers to achieve homeownership much earlier than they would have on their own.

Who can give gift funds on a conventional loan?

Not just anybody can help you make the down payment on your home. Gifts from the following sources are acceptable:

• Spouses, fiances, or domestic partners
• Children or other dependents
• Other relatives by blood, marriage, adoption, or legal guardianship

Interested parties, such as real estate agents or the home’s seller, cannot donate to the cause.

However, the home’s seller could help, indirectly, through seller concessions, up to 3% of the purchase price if you’re putting less than 10% down.

Technically, seller concessions can go only toward your closing costs. But, in reality, getting help with closing costs could free up more of your own money for your down payment.

What documentation is required when a gift is being used on a conventional loan?

Lenders will need to track the source of your down payment funds. Along with asking for a gift letter, expect your loan officer to check one or more of the following:

• Your bank statements before and after the gift is deposited
• Your donor’s bank statements before and after the gift is deposited
• Deposit slips showing when you deposited the donor’s check
• Withdrawal slip showing the money leaving the donor’s account
• A copy of the deposited donation check
• Proof of a wire transfer between banks

It’s okay if you don’t have access to all of these documents. Obviously, if you received funds via wire transfer you won’t have a check to show.

Basically, the lender needs to trace the money from the donor’s bank account to your bank account. Keep in mind, the amount of the transfer must match what’s stated in the gift letter.

FHA loan gift funds

The typical FHA borrower makes a 3.5% down payment on a home. This means that if the purchase price is $300,000, the borrower needs to come up with $10,500. The FHA calls this down payment the borrower’s required “minimum investment.”

The minimum investment is the FHA’s way of making sure the homebuyer has “skin in the game” which lowers the risk of foreclosure.

But there’s one exception to the minimum investment rule: The minimum investment can come from a cash gift. Borrowers do not need to contribute any of their own funds if receiving a gift for the full 3.5% down payment.

USDA and VA loan gift funds

Using gifts on USDA and VA loans is less common because these loans do not require a down payment.

However, borrowers may still need help buying a new home with these loans, and gifted money can provide that help. For instance, if the new home’s appraised value is lower than the purchase price, the buyer will need cash to make up the difference. (Lenders won’t underwrite more than the appraised value of the home.)

Also, USDA loan and VA loan borrowers can use gifted money for closing costs.

U.S. Department of Agriculture Rural Development (USDA Guaranteed loans) allow gift funds to cover any down payment required or closing costs not already covered by the seller.

Likewise, The Veterans Administration (VA) allows gifts. For both of these programs, follow the same donor guidelines and documentation procedures as for conventional loans.

Check your mortgage rates. Start here (Sep 16th, 2024)

Who can give down payment gifts?

Typically, donors of financial gifts toward purchasing a house need to be relatives.

According to Fannie Mae’s underwriting guide, the gift giver can be “a relative, defined as the borrower’s spouse, child, or another dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.”

In addition, a fiancé or domestic partner can be the source of funds.

FHA expands the rules a bit, allowing an employer, labor union, charitable organization or government agency to contribute. There’s even a provision for a close friend to give a gift, provided a documented, long-term relationship was in existence prior to the real estate transaction.

An example would be a high school yearbook, a family photo album, or proof of being roommates in college. This is the kind of real-life documentation the underwriter might ask for when receiving gifted funds from a friend.

What gifts are unacceptable?

Whether you qualify for FHA or conventional financing, lenders ultimately want to know one thing: Is the money from a legitimate gift?

Lenders worry about illegitimate gifts because they could put the loan itself in jeopardy. The point of mortgage underwriting is to make sure you’re willing and able to make the new home’s mortgage payments.

If a down payment gift were really a loan, repaying the loan could make it more difficult to pay the actual mortgage payments.

Gifts can’t come from anyone who would benefit from the sale of the home – the seller, agents, loan officer, etc. – even if any of those individuals are related to the buyer.

Any sums of money received from anyone involved in the transaction are subject to the limits of “interested party contributions” as designated by the loan program. These funds could not be used for the down payment but only for closing costs.

For instance, FHA allows a maximum of 6% of the sales price in interested party contributions. These funds can only be applied to closing costs. Conventional financing allows:

• 3% contribution with a down payment of less than 10%.
• 6% contribution with a down payment between 10% – 25%
• 9% interested contribution for closing costs for down payments over 25%

Again, these funds can only be applied to closing costs, not the down payment.

Documenting the source of gifted mortgage funds

Another piece of documentation is the source of the funds. “Sourcing” funds, as it’s called within the mortgage industry, means showing proof of where the money came from. When dealing with gift funds, “sourcing” gift funds means providing a bank statement showing that the donor does in fact have enough money to give.

This is where things can get a bit sticky. Often, the mortgage lender requires the donor to hand over a full copy of his or her bank statements, showing all transactions and personal information.

Many donors don’t exactly enjoy handing over personal information for a loan that’s not even theirs. Anyone receiving a gift should let the donor know upfront about this requirement.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

More about gift money documentation

Next, a “paper trail” needs to be established. A paper trail is a set of documents that follow the money. The paper trail would include:

• A bank statement showing the gift money came out of the donor’s account
• A withdrawal receipt from the donor
• A deposit receipt from the receiver
• A statement from the receiver’s bank showing the money is now credited to his or her account

Then the receiver will have to show proof of the gift money coming out and a receipt from escrow showing the funds were received.

Some steps can be cut out if the donor wires the gift money directly to the escrow company handling the transaction. In that case, all that would be needed is the donor’s bank statement and a receipt from escrow.

Likewise, if gift funds were received a long time ago, documenting it may not be necessary. The mortgage lender considers the funds yours if you can show bank statements that do not show the initial deposit.

The gift money would then be considered “seasoned,” which means they have been in your possession long enough to be considered yours.

Alternatives to down payment gift funds

Not everyone has relatives who can donate tens of thousands of dollars for a down payment. That’s fine. You can still find help through down payment assistance programs.

Down payment assistance programs often help first-time home buyers through grants or loans. Many of the loans are forgivable if you stay in the home long enough.

There’s no single source for down payment assistance. Instead, programs are local. Check with your city or county government or Google “down payment assistance” to find local programs. Some of these programs have income limits; others require first-time buyers to complete a homeowners education course.

As with down payment gifts, tell your lender and real estate agent as soon as possible if you’ll be using down payment assistance.

What is a gift of equity?

Conventional loans allow for a gift type called a “gift of equity.” This could help if you’re buying a home from a family member. Basically, the seller charges you less than the home’s appraised value. The difference between the home’s value and what you pay serves as a gifted down payment.

For this to work, the current owner must still be an eligible donor, per conventional loan gift guidelines, and must own and have equity in a piece of property.

Here’s an example: Your parents own a second home worth $300,000 but have agreed to sell it to you for $240,000. The $60,000 price difference becomes your 20% down payment.

The paperwork would still show a home purchase price of $300,000, even though you’d borrow only $240,000.

As far as the paper trail, the lender will accept the final settlement statement, also called the final HUD-1. The final HUD-1 statement is provided by the escrow company and displays each fee that’s related to the property sale transaction.

The HUD-1 will show the gift by showing an item stating “Gift of Equity – $60,000,” or something to that effect. This is proof that the intangible equity has been transferred from the seller to the buyer.

The gift of equity may appear to fall within the definition of an interested party contribution since it’s the seller who is giving the gift. However, Fannie Mae and Freddie Mac make this situation exempt from interested party contribution rules when the buyer and seller have an eligible relationship.

Click here to check your home buying eligibility. Start here (Sep 16th, 2024)

Gifted money helps, but you still have to qualify

Receiving gifts can push you over one of the biggest home buying hurdles, but the down payment is only one piece of the puzzle.
You’ll also need to meet your lender’s:

• Credit score requirement: For conventional loans, the minimum is often 620. FHA lenders can go as low as 580 with a 3.5% down payment
• DTI limits: This stands for debt-to-income ratio. DTI compares your monthly income to your mortgage payment and other debts. Conventional lenders look for DTIs in the 36% to 43% range; FHA lenders can go higher, possibly up to 50% in some cases
• Income documentation rules: Lenders will want to see pay stubs, W2 forms, bank accounts, or tax returns. This proves you earn a steady and reliable income

The good news is that down payment gifts can help you overcome other qualifying challenges. For example, if your DTI is pushing your lender’s limits, a bigger down payment can lower your mortgage payment which, in turn, lowers your DTI.

Before you apply for a loan, use a mortgage calculator to see loan payments for different loan sizes and down payment amounts.

Mortgage loan gift funds FAQs

What are gift funds?

When family members donate money toward your down payment or closing costs, lenders call this money “gift funds” or “gifted funds.” Most types of loans allow gift funds now.

Are gift funds for a mortgage taxable?

For the home buyer, gift funds are not taxable. For the donor, gifts are subject to the IRS’s gift tax if the gift exceeds $17,000 in the 2023 tax year.

Who can give gift funds on a conventional loan?

Family members can contribute toward your down payment. This includes grandparents, parents, children, spouses, domestic partners, fiances, blood-related aunts, and uncles.

Are gift funds allowed on conventional loans?

Yes. In fact, if you’re buying a single-family home to use as a primary residence, gift funds can cover all of your down payment and closing costs.

Can a friend give gift funds for an FHA mortgage?

In some cases, friends can give gift funds for an FHA loan down payment. The lender will need proof that you have a long-term friendship with the donor. A high school or college yearbook could provide this proof.

Can you use gift funds toward a second home?

Yes. But if you’re putting less than 20% down on the second home, you’ll need to provide at least 5% of the down payment yourself.

Can gift funds be repaid?

For a loan originator to accept gifted funds, the donor has to give the money with no strings attached. There can be no expectation of repayment.

What happens if you pay back a down payment gift?

If your gifted money is actually a loan in disguise, you’d be committing mortgage fraud. It’s fraud because you would have misled the lender for the purposes of qualifying for the loan. However, if you wanted to return the gift later after you’d paid off or refinanced the mortgage, that would be between you and the donor.

Receiving gift funds is well worth the effort

Documenting down payment gifts can be complicated, but the process can be well worth it. For many first-time home buyers, gifts can mean the difference between buying a home now or buying a home years from now.

Receiving a gift reduces the amount of savings needed to close the purchase, and gifts also lower the payment on the future mortgage loan.

With a little education and a willing donor, receiving a gift to be applied toward the down payment on a house can turn out to be a sweet deal for a first-time home buyer.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

The post Down Payment Gift Money for First-Time & Repeat Home Buyers first appeared on My Mortgage Insider.

• Buying with no money down: Usually, home buyers put at least 3% down, and a lot of buyers need larger down payments to get competitive interest rates. USDA loans require no money down.
• Getting competitive interest rates: Even with no down payment, USDA loans can offer competitive interest rates because they’re guaranteed by the federal government.
• Paying less mortgage insurance than with an FHA loan: Compared to federally insured FHA loans, USDA loans charge lower mortgage insurance premiums.

If you meet the USDA’s geographic and income rules, a USDA Guaranteed Loan could make you a homeowner with less money out of pocket.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

What is a USDA home loan?

USDA home loans help Americans in rural and suburban areas become homeowners through two separate loan programs:

• USDA Guaranteed Loans: The USDA insures private mortgage loans for moderate-income buyers in rural areas
• USDA Direct Loans: The U.S. Department of Agriculture lends money directly to low-income home buyers who live in eligible rural areas

This article will focus on the USDA Guaranteed Loan program, which is far more common than the USDA Direct Loan. This program works like most other loan types available to current home buyers.

In a nutshell: private lenders lend money so the borrower can finance a new home purchase. Mortgage payments go to the private lender or loan servicer.

The U.S. Department of Agriculture’s role is to insure the loans, making them more attractive for lenders. The USDA’s end goal is rural development, and these attractive home loan options help spur growth.

USDA loan requirements for 2024

Before you apply for the USDA home loan program, make sure you meet the program’s eligibility requirements:

• Geography: If the city you’re buying a home in has fewer than 10,000 residents, your home should meet the USDA definition of a “rural area.” Unincorporated areas also qualify. Some municipalities with up to 20,000 people will qualify for USDA financing.
• Income: Your household income must fall below the USDA’s limits for your area. The limit is 115% of your area’s median income. If your area’s median income is $50,000, you can’t earn more than $57,500. You can measure your income eligibility using this USDA tool.
• Home characteristics: USDA loans finance primary residences only. USDA loans can finance a manufactured home if it’s brand new.

If you meet both the income and the geographical requirements above, you’re eligible to submit a USDA loan application. However, USDA loan eligibility doesn’t guarantee USDA loan approval.

Getting approved for a USDA loan

The USDA insures loans for moderate-income people who are buying rural housing. But private mortgage lenders underwrite these loans.

To get your application approved, you’ll need to meet your lender’s requirements. These include:

• Credit score: USDA-approved lenders usually look for FICO scores of 640 — higher than the 620 that most conventional lenders require and the 580 FHA lenders can accept. If you haven’t established a credit score yet, your lender may be able to check your rent and utility payment histories instead.
• Debt-to-income ratio: 41% is the maximum DTI allowed by the USDA. This is also more strict than many conventional loans, which top out at 43%, and FHA loans which could go as high as 50% DTI in some cases.
• Employment history: USDA-approved lenders want to see at least two years of steady employment.

If you meet all of those requirements — and if your home purchase price does not exceed the home’s appraised value — you could buy the home with no money down.

Step-by-step guide to getting a USDA loan

To get your USDA home loan, follow these steps:

1. Get preapproved for a USDA loan

The preapproval process shows how your application would perform in a real underwriting process. You’ll get a good idea about your price range and monthly payment size without making any commitments.

It’s smart to get at least three preapprovals since lenders’ rates can vary.

2. Find a home in an “eligible rural area”

USDA Guaranteed Loans typically finance single-family homes in cities and towns with populations of 20,000 or fewer and in unincorporated areas.

Not sure about a property? Enter the address into this map before making an offer on the home.

3. Apply for your loan

After you’ve found a home, made an offer, and gone under contract, it’s time to apply for the USDA rural development loan.

You’ve already compared lender offers in Step 1. Now you can make your application official with one of the lenders. USDA loans offer 30-year terms with fixed rates.

4. Follow your loan officer’s instructions

Your loan officer will guide you through the process of uploading financial data for the underwriting process. Be sure to respond to your loan officer’s request for more information as quickly as possible.

5. Get your own home inspection

The USDA will check out the home you’re buying to make sure it provides minimum safe living conditions. To get a more thorough assessment of the home’s condition, you should hire your own home inspector.

If your inspector finds major structural damage or systemic problems with the home, you may want to look for a different home. You could also ask the home’s current owner to fix the problems.

6. Close the home loan

If you’re happy with the home inspection — and if your lender’s underwriters are satisfied with your financials — it’s time to make the home purchase official.

USDA home loans do not require down payments as long as the home’s purchase price does not exceed its appraised value. But you will need to pay closing costs, which often range between 2% and 5% of the loan amount. For a $250,000 home, closing costs could range from $5,000 to $12,500.

Closing cost or down payment assistance programs in your area may be able to help.

How USDA loans work

A no-money-down mortgage may seem too good to be true, especially in a market where a lot of homebuyers still think they’d need 20% down.

Many first-time home buyers wonder: How can lenders allow no-money-down mortgages while still charging competitive interest rates?

It’s possible because of the USDA’s mortgage insurance. This insurance would compensate the lender after a foreclosure. In short, lenders face less risk, and less risk translates into a better deal for home buyers.

Repeat and first-time home buyers can benefit from the USDA program, as long as they’re buying a primary residence, live in a designated rural area, and earn less than 115% of their area’s median income.

USDA Guarantee Fees

USDA loans aren’t a handout. Home buyers contribute to the cost of their loan’s USDA mortgage insurance. They pay through the USDA’s guarantee fees.

The first guarantee fee adds 1% to the loan amount at closing. For a $250,000 home loan, this upfront guarantee fee would cost $2,500. Buyers can roll this fee into the loan amount and still buy with no money down.

Along with the upfront fee, buyers pay an annual USDA loan fee of 0.35% of the loan amount. For the same $250,000 home, the annual fee would cost $875 — or about $73 a month — during the first year.

This annual fee will be added to your monthly payments for the life of the loan. But the fee gets smaller as the loan balance decreases. Refinancing into a conventional loan later would eliminate this annual fee.

How USDA loan fees compare to other types of mortgages

The USDA’s guarantee fees can be money well spent. They allow you to borrow at competitive interest rates with no down payment — an advantageous route to homeownership.

Plus, other types of loans charge mortgage insurance fees, too.

• FHA loans: Charge mortgage insurance premiums of 1.75% upfront and 0.85% annually. Unless borrowers put 10% or more down, they pay the FHA’s annual fee for the life of the loan.
• Conventional loans: Need no upfront mortgage insurance but require private mortgage insurance (PMI) when borrowers put less than 20% down. PMI normally ranges from 0.5% to 1.5% a year. Buyers can cancel PMI once they’ve built up 20% home equity.
• VA loans: Charge an upfront fee of 2.3% for first-time buyers with zero down and up to 3.6% for repeat buyers. VA loans do not require annual mortgage insurance

Compared to these loan types, USDA loans charge lower fees. Only VA loans, which go to veterans and active duty military service members, can charge less with no money down.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

More about USDA loan eligibility

The biggest drawback to USDA loans is that — unlike FHA and conventional loans — not everyone can apply for USDA-insured financing.

But USDA eligibility may not be as difficult as you think. Let’s look at each of the requirements for eligibility.

USDA income limits

What does 115% of area median income really mean?

A family of two is eligible to buy a home in a Seattle suburb area with an annual income of up to $93,450. If you have a family of five and you’re moving to the same area, you can make up to $123,350 a year.

Annual income limits vary by region. For a five-person family, here is the maximum qualifying annual income in other areas:

• San Antonio, TX: $98,650
• Chicago, IL: $115,100
• San Jose, CA: $161,000
• Miami, FL: $106,700
• Richmond, VA: $114,750

As you can see, you can earn a healthy income and still qualify for USDA financing.

USDA credit score requirements

Potential borrowers don’t need to have “good” credit history to get a USDA mortgage loan. Lenders require a credit score of just 640 to qualify.

USDA geographic requirements

A smart first step is to check with a USDA lender on the USDA-eligible area closest to your current residence.

Most lenders, especially those around eligible areas, offer USDA loans. They process all the paperwork and work directly with the U.S. Department of Agriculture to get a loan approved.

USDA loans work for homes in unincorporated rural areas and in small towns with populations of 10,000 or fewer. A lot of municipalities with up to 20,000 can qualify if the area is “rural in nature,” according to the USDA.

But this doesn’t mean you’d need to buy a house that’s located an hour from the nearest grocery store, restaurants, and medical clinics.

In fact, USDA financing can work in the outlying suburbs that surround many of the nation’s biggest cities.

If your current lender does not offer USDA loans, find one that does. Don’t opt for FHA simply because your preferred lender can’t do USDA loans.

USDA first-time home buyer FAQs

Does the USDA require first-time home buyer education?

USDA Guaranteed home loans do not require first-time home buyer education. Even though it’s not required, home buyers can benefit from a brief education course if they’re not already familiar with the mortgage application process. USDA Direct loans — for which the USDA is the lender — do require first-time home buyers to take an education course.

How do I qualify for a USDA loan?

First, make sure you’re USDA loan eligible. This means buying in a small town or unincorporated area and earning 115% or less of your area’s median income. Then, make sure you are eligible as a borrower. It’s best to have a credit score of 640 or higher and a debt-to-income ratio of 41% or lower.

Are only first-time home buyers eligible for USDA loans?

No, any home shopper who’s buying a primary residence — and not a vacation home or investment property — can apply for USDA financing.

What is the maximum amount I can borrow with a USDA loan?

The USDA doesn’t set a maximum for USDA Guaranteed Loans. Instead, your lender does. Lenders base maximum loan sizes on borrowers’ ability to repay the loan. Debt-to-income ratio (DTI) and income level affect maximum loan size. The USDA will insure the loan as long as the loan amount doesn’t surpass the appraised value of the home.

How much are closing costs for a USDA loan?

Closing costs vary, but they typically range from 2% to 5% of the loan amount. On a $250,000 loan, closing costs could range from $5,000 to $12,500. The home’s seller, or a closing cost assistance program in your area, may be able to help.

Do USDA home loans require a down payment?

No, USDA loans require no down payment as long as the home’s appraised value is higher than the loan amount. If, for some reason, your purchase price exceeds the appraised value, you’d need a down payment to make up the difference. For example, if the home you’re buying is appraised at $245,000 but you’ve agreed to pay $250,000, you’ll need to make a $5,000 down payment.

What is the minimum credit requirement for a USDA?

Most USDA lenders look for credit scores of at least 640 and debt-to-income ratios of 41% or less.

Do USDA loans have PMI?

No, but they charge a similar fee: the USDA’s guarantee fee. This costs 1% of the loan amount upfront and 0.35% of the loan amount each year. This annual rate is cheaper than most PMI policies which average about 1% per year.

How do I find out whether a property is USDA-eligible?

To find out whether a property is USDA-eligible, enter the home’s address into the USDA’s lookup tool.

Can I buy a foreclosure with a USDA loan?

Yes, if you and the home meet the USDA’s eligibility rules, the USDA will insure a loan on a foreclosed home. Keep in mind the home will need to meet the USDA’s basic requirements for safety and livability. A lot of fixer-uppers don’t meet this requirement.

Check your rates for a USDA mortgage

Average rates for home purchases and refinances have risen back to their historic norms.

Your USDA loan rate will depend on your income, debt, and credit score.

The USDA loan program can offer competitive rates even when you have average credit and no down payment.

That’s one reason USDA loans can be so attractive to first-time home buyers.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

The post USDA Loans: First-time Home Buyer’s Guide 2024 first appeared on My Mortgage Insider.

There is a limit to how much a seller can pay for, though. Each loan type — conventional, FHA, VA, and USDA — sets maximums on seller-paid closing costs.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What are seller concessions?

Seller concessions are closing costs the seller has agreed to pay. These are also known as seller-paid costs, or sometimes as sales concessions or seller contributions. New and experienced homebuyers can get into homes faster with help from the seller.

In this article:

• Conventional loan seller contributions
• FHA loan seller contributions
• VA loan seller contributions
• USDA loan seller contributions
• How to use excess seller contributions
• Our recommended lenders for home loans

Seller contributions by loan type

Each loan type has slightly different rules when it comes to seller contributions. The percentage each loan type allows varies as well. It’s important to understand the seller-paid maximums for your loan type, so you can take full advantage when it comes time to buy.

Maximum seller-paid costs for conventional loans

Fannie Mae and Freddie Mac are the two rule makers for conventional loans. They set maximum seller-paid closing costs that are different from other loan types such as FHA and VA. While seller-paid cost amounts are capped, the limits are very generous.

A homebuyer purchasing a $250,000 house with 10% down could receive up to $15,000 in closing cost assistance (6% of the sales price). This dollar figure is a lot more than the typical seller is willing to contribute, so the limits won’t even be a factor in most cases.

Source: Fannie Mae Selling Guide

FHA seller contributions

FHA seller concessions have similar rules to conventional loans. For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.

If the appraised home value is less than the purchase price, the seller may still contribute 6% of the value. FHA indictors that the lessor of the two (purchase versus appraised) values may be used.

VA loan seller contribution maximum

The seller may contribute up to 4% of the sale price, plus reasonable and customary loan costs on VA home loans. Total contributions may exceed 4% because standard closing costs do not count toward the total.

According to VA guidelines, the 4% rule only applies to items such as:

• Prepayment of property taxes and insurance
• Appliances and other gifts from the builder
• Discount points above 2% of the loan amount
• Payoff of the buyer’s judgments and debts
• Payment of the VA funding fee

For example, a buyer’s core closing costs for things like appraisal, loan origination, and the title equal 2% of the purchase price. The seller agrees to prepay taxes, insurance, the VA funding fee, and a credit card balance equal to 3% of the sales price.

This 5% contribution would be allowed because 2% is going toward the core loan closing costs.

USDA seller contributions

USDA loan guidelines state that the seller may contribute up to 6% of the sales price toward the buyer’s reasonable closing costs. Guidelines also state that closing costs can’t exceed those charged by other applicants by the lender for similar transactions such as FHA-insured or VA-guaranteed mortgage loans.

Interested party contributions

Seller-paid costs fall within a broader category of real estate-related funds called interested party contributions or IPCs. These costs are contributions that incentivize the homebuyer to buy that particular home. IPCs are allowed up to a certain dollar amount.

Who is considered an interested party? Your real estate agent, the home builder, and of course the home seller. Even funds from down payment assistance programs are considered IPCs if the funds originate from the seller and run through a non-profit.

Anyone who might benefit from the sale of the home is considered an interested party, and their contribution to the buyer is limited.

Why set maximum seller-paid closing costs?

Mortgage rule makers such as Fannie Mae, Freddie Mac, and HUD aim to keep the housing market fair by keeping values and prices sustainable.

Here’s an example of how rampant seller-paid closing costs and other interested party contributions could inflate prices.

Imagine you are buying a home worth $250,000. The seller really wants to sell the home fast, so he offers $25,000 to pay for your closing costs and says you can keep whatever is left over. But, in exchange he changes the home price to $275,000.

He then illegally pays the appraiser to establish a value of $275,000 for the home.

A number of negative consequences arise:

• You paid too much for the home.
• Similar homes in the neighborhood will start selling for $275,000 (and, more if the cycle is repeated).
• The bank’s loan amount is not based on the true value of the home.

In a very short time, property values and loan amounts are at unrealistic levels. If homeowners stop making their payments, banks and mortgage investors are left holding the bill.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Can the seller contribute more than actual closing costs?

No. The seller’s maximum contribution is the lesser of the sales price percentage determined by the loan type or the actual closing costs.

For instance, a homebuyer has $5,000 in closing costs and the maximum seller contribution amount is $10,000. The maximum the seller can contribute is $5,000 even though the limits are higher.

Seller contributions may not be used to help the buyer with the down payment, to reduce the borrower’s loan principal, or otherwise be kicked back to the buyer above the actual closing cost amount.

Creative ways to use excess seller contributions

While seller contributions are limited to actual closing costs, you can constructively increase your closing costs to use up all available funds.

Imagine the seller is willing to contribute $7,000, but your closing costs are only $5,000. That’s a whopping $2,000 is on the line.

In this situation, ask your lender to quote you specific costs to lower the rate. You could end up shaving 0.125%-0.25% off your rate using the excess seller contribution.

You can also use seller credits to prepay your homeowners insurance, taxes, and sometimes even HOA dues. Ask your lender and escrow agent if there are any sewer capacity charges and/or other transfer taxes or fees that you could pay for in advance. Chances are there is a way to use all the money available to you.

You can even use seller credit to pay upfront funding fees for government loan types like FHA.

Use seller contributions for upfront FHA, VA, and USDA fees

All government-backed loan types allow you to prepay funding fees with seller contributions.

FHA loans require an upfront mortgage insurance payment equal to 1.75% of the loan amount. The seller may pay this fee as part of FHA seller concessions. However, the entire fee must be paid by the seller. If you use excess seller credit, but it’s not enough to cover the entire upfront fee, then you cannot use the funds toward the fee.

VA loans allow the seller to pay all or part of the upfront fee (2.3%-3.6% of the loan amount). The fee counts towards VA’s 4% maximum contribution rule.

USDA requires an upfront guarantee fee of 2.0% of the loan amount. The buyer can use seller contributions to pay for it.

Seller contributions help many become owners

Seller contributions and other interested party credits reduce the amount of money it takes to get into a home.

Zero-down loans such as USDA and VA require nothing down. But, opening any loan involves thousands in closing costs.

A seller credit can remove the closing cost barrier and help buyers get into homes for little or nothing out-of-pocket.

To see if you qualify to buy a home with zero down and low out-of-pocket expense, click here and complete a short form.

Many home shoppers are surprised that they not only qualify, but that initial homeownership costs are much lower than they expected.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Seller Contribution Maximums for Conventional, FHA, VA, USDA | 2024 first appeared on My Mortgage Insider.

That’s where a down payment gift comes in — if a close friend or family member wants to chip in and help the prospective homebuyer purchase a home, they can do so. However, there are strict rules and regulations for such a transfer of cash. Here’s what you need to know.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

How does using gift money for a mortgage down payment work?

“I see gift money becoming more popular, especially among millennials,” says Joann Perito, broker and owner of Avenues Unlimited. “Even if they make good money, because of large student loan amounts, it can be difficult for them to save for a down payment.”

In 2020, 58% of home buyers came up with their down payment primarily from their own funds. But this cost is often prohibitive, especially for first-time homebuyers who don’t have the benefit of funds from the sale of their current residence. 

You can use gifted funds to make a down payment, but your mortgage lender will want to know some details before they allow you to use it. Only two specific groups can give a home buyer money to fund their down payment.

• Family members — as long as they can prove they have a standing relationship with the buyer. Sometimes the gift can come from a friend as well, but not all loan programs permit this.
• Government agency, non-profit, or other organization offering down payment assistance — as part of a program meant to get first-time buyers into the market.

Dos and don’ts of a down payment gift

Check your home buying eligibility. Start here (Sep 16th, 2024)

Can you pay back a mortgage gift?

The answer is no. This is considered mortgage or loan fraud, which is a crime. It can also put your loan qualification at risk as all loans need to be factored into your debt-to-income ratio.

Perito has seen borrowers tell the lender their parents are gifting the money, but it’s actually a loan. “They expect their kids to pay it back eventually,” she says. “That can cause a problem because the lender has to take that into consideration for the debt-to-income ratio.”

The moral of this story: Be honest with your lender about where you’re receiving all funds for your down payment — they’ll likely find out anyway.

What else should you know about down payment gifts?

As previously mentioned, there’s a difference between receiving a down payment gift and a down payment loan. Buyers need to be clear with their mortgage lenders and confirm that the money received was gifted. A sudden infusion of cash without a traceable source will leave lenders suspicious and, perhaps, wary of completing the loan deal on their end.

Plus, you should talk with your lender to make sure you are reporting the gift properly to the IRS. The responsibility for this is on the borrower and gifter, as lenders are not required to report it.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Tax implications of a down payment gift

As previously mentioned, family members have to pay a gift tax for anything over their limit of $17,000, or a collective $34,000 from parents who file taxes jointly. The person receiving the money doesn’t have to pay taxes.

If the donor wants to give more than $17,000, they can either pay taxes or claim the money as part of their $12.06 million lifetime exemption for gift taxes. However, this decision shouldn’t be taken lightly, especially if the donor hopes to pass on a hefty estate to their heirs later on. The $12.06 million exemption applies to taxes on these funds, so using up the value now could force family members to pay tax on whatever they inherit.

For borrowers interested in borrowing more without tax implications, there may be options involving separate gifts. Speak with a CPA if this applies to you.

Buying a home is more than a down payment

Ultimately, the cost of the down payment is only one expense to consider in the home-buying process. Homebuyers need to pay for closing costs, which include expenses like an appraisal, credit report, and underwriting fees.

“Many people these days have a hard time coming up with $1,000 to become a homeowner,” Perito says. “I always ask them where they’ll be getting money for the inspection, moving costs, and other expenses. I suggest to all my buyers that they have at least $4,000 in the bank before they buy a house.”

Down payment gifts can make it easier for homebuyers to afford a home

If you’re in the market for a new home and want a little help, don’t hesitate — just make sure you follow the above steps to ensure you accept such a gift in the proper manner. A gift can put homeownership in reach for plenty of aspiring homeowners.

When you speak with your lender about which loan program is best for you, be sure to let them know up front that you plan on using gift funds for the down payment. Some loan programs have strict guidelines about how much gift money you can use for a down payment and who can gift you the money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

What is a gift letter?

A gift letter confirms the relationship between you and the gift giver

If you plan on getting gift funds from a friend or family member, you’ll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties.

Gift Letter Template

The lender may also require further evidence of the gift — for instance, they may ask to see the gift-giver’s bank statements to show there are sufficient funds in the donor’s account to make the gift. They may also ask for a deposit slip or balance statement from the buyer’s account to show the down payment funds have been transferred.

Often gifts change hands during the application process. This allows time for the money to show up on both the giver and the buyer’s bank statements and for the mortgage lender to verify that the cash is from a legitimate source and the pair has an appropriate relationship.

If the gift funds are added to the buyer’s bank account after settlement, then documentation will still be required before it can be applied to the purchase. Typically, this will require a receipt of the cashier’s check as given to the closing agent.

Why do I need a gift letter?

You’ll need to provide a gift letter to your lender for a few reasons. 

First, the lender wants to assess your debt-to-income ratio (DTI) accurately. With that, the lender wants to confirm with you that there is no expectation of repaying the gift money. If you were expected to repay the gift, that could significantly impact your DTI. 

Second, government agencies want to confirm that the funds are legitimate and conform with all gift tax laws. Basically, the government wants to ensure that this gift money is not a part of a money-laundering scheme.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Gift letter rules by loan type

Depending on the type of loan you are pursuing, there are slightly different gift letter rules. You’ll need to outline exactly how you are related to the gift giver in your letter with each loan type. Your loan officer should be able to provide you with the correct gift letter rules and format for your loan.

Here’s what you need to know about each. 

VA loans

The VA loan allows eligible military service members and veterans to purchase a home with 0% down. If eligible, you can receive a gift for your home purchase from almost anyone. However, the gift cannot be from an interested party. 

Interested parties would include a builder, developer, real estate agent, or seller. Essentially, anyone involved in your home sale transaction is not allowed to provide gift funds.

Check your VA home loan eligibility. Start here (Sep 16th, 2024)

Conventional loans

Conventional loans allow homebuyers to use gift money to cover a down payment and closing costs. The only caveat is that the funds must be from an acceptable source. Acceptable sources of gift funds include most family members. 

Fannie Mae and Freddie Mac consider spouses, children, and dependents to be relatives. Essentially, anyone related to the borrower by blood, marriage, adoption, or legal guardianship can provide gift funds. Additionally, a fiance or domestic partner can provide gift funds. 

Importantly, you cannot receive gift funds from someone involved in the transaction. 

FHA loans

If buying a home with an FHA loan — a loan guaranteed by the Federal Housing Administration — then you can use gift funds from certain parties. As with a conventional loan, you can receive gift funds from a relative. Additionally, your employer, labor union, or close friend can offer gift funds. And of course, government agencies that provide homeownership assistance grants can provide gift funds.

Again, you won’t be able to accept gift funds from anyone involved in the real estate transaction.

Check your FHA eligibility. Start here (Sep 16th, 2024)

USDA loans

USDA loans help borrowers in rural areas achieve the goal of homeownership. As a borrower pursuing a USDA loan, you cannot receive gift funds from any interested parties. 

But you may receive gift funds from family members and others who want to help.

Check your FHA eligibility. Start here (Sep 16th, 2024)

Down payment gift rules by property type

The use you have planned for the property will impact how gift funds can be used. Here’s what you need to know. 

Primary residences

If purchasing a primary residence, the loan options above may all be on the table. Depending on the loan type, you can use gift funds to cover some or all of the down payment amount. Additionally, gift funds can be used to cover closing costs. 

Secondary residences

If you are purchasing a secondary residence, your loan options are more limited. In most cases, you’ll have to pursue a conventional loan. With that, you can still accept gift funds. However, a lender may require you to contribute some of your own funds to supplement the gift when closing on a secondary residence. 

Investment properties

In general, borrowers cannot use gift funds as a down payment on an investment property. Typically, investors will need to come up with at least 5% of the down payment out of their own pocket. But the rest can be a gift. 

However, if you are using gift funds to support the purchase of an investment property outright, there are no explicit rules against that. Of course, you’ll need to abide by the tax rules surrounding gift limits. But if the gift is under the $17,000 limit, you may be able to use gift funds to help purchase an investment property outright. 

How much money can I receive as a gift?

As of 2023, any one person can contribute $17,000 to any other one person without tax consequences, which could, for example, total as much as $34,000 to one child, if each parent contributes.

In many cases, there’s no limit on the dollar amount of gift money that can go into a down payment, as long as the buyer is purchasing a primary residence. However, if someone uses a down payment gift to buy a second home or investment property, they have to pay at least 5% of the down payment. The rest can be a gift.

What is seasoned money?

If possible, it’s a good idea to ensure gift money is seasoned when it comes time to funnel it into a down payment — this avoids the gift documentation needed, too. Lenders want proof that funds have been in the buyer’s account for a substantial amount of time to show that the buyer hasn’t just gathered a bunch of cash on a short-term basis.

Seasoned funds should sit in the buyer’s bank account for, ideally, two months before the buying process. So, if you received a $10,000 gift from your Aunt Mary three months ago to help you buy a house, then the bank probably won’t ask about it — this is seasoned money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

Down payment gifts FAQ

How do I write a gift letter for a down payment?

A gift letter will need to confirm the donor’s relationship to the buyer. Plus, it should verify that the donor does not expect any repayment of this gift. 

And it can go something like this:

I, the gift donor, intend to gift $X amount to the gift recipient. The gift recipient is my (list relationship, such as son or nephew), and will use the funds as a part of their purchase of X property. I expect no repayment of this gift. The source of the gift funds is X. 

The donor will need to sign off on the letter, which must be provided to your mortgage lender. Plus, the donor may want to include their phone number in case the loan officer has any questions.

How much can be gifted for a down payment?

Any amount can be gifted for a down payment. But as of 2023, parents can only contribute a combined $34,000 per child to help with a down payment, otherwise, the gift would be subject to a special tax. Other family members have a $17,000 lending limit before they also run into the gift tax. 

Do all lenders require a gift letter?

Yes, all lenders will require a gift letter. Although you may have the funds, the lender needs to confirm that you won’t have to repay the gift. Plus, the lender must ensure that the funds came from a legitimate source. 

What is a gift letter for a mortgage down payment?

A gift letter is a document that the borrower and donor will need to provide a mortgage lender in the application process if the applicant received gift funds to cover the down payment. The goal of a gift letter is to provide the lender with proof of where the funds came from. Plus, ensure that the funds do not have to be repaid. 

Who should write a letter of explanation for a gift down payment?

The donor should write the gift letter to the lender. However, the borrower can help the donor craft a letter as long as the donor signs the document. 

Can a mortgage gift be repaid?

The gift letter will have to explicitly state that the donor doesn’t expect repayment of the funds. With that, you cannot repay the donor. 

What happens if you pay back a gift down payment?

If you pay back a gift down payment, after a gift letter explicitly stated that you would not, that will constitute mortgage fraud. With that, your home loan may be at risk. 

Does a mortgage gift letter get reported to the IRS?

A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS. That’s because any gift below the $17,000 limit will not incur the gift tax. However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS. With that, the involved parties should be prepared to cover the gift tax. 

Keep in mind that the limit will change each year. 

Are there tax consequences for giving down payment gifts?

As of 2023, the gift tax will be levied on gifts of more than $17,000 per donor. With that, parents can gift an adult child $17,000 each in 2023 for a combined total of $34,000. After that threshold, the gift would be subject to a tax. 

If you give a gift of more than the current limit, you should expect to pay taxes on the amount of the gift. 

What is a gift of equity letter?

A gift of equity is when someone sells you a home for much less than it is actually worth. For example, a parent may sell a child a home worth $250,000 for $100,000. In this situation, the seller would have to provide the lender with a gift of equity letter. The letter would outline the exact amount of equity gifted. However, keep in mind that the gift tax still applies to the amount gifted through this option. 

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

The post The Do’s & Don’ts of Down Payment Gifts | Free Gift Letter Template first appeared on My Mortgage Insider.

“I’ve been in this business for 30 years. Having 20 percent down is just one of those myths about lending that is out there,” says Jill Hoogendyk, branch manager and mortgage expert at Prospect Mortgage, Phoenix. “Things are always changing. The only reason people usually put down 20 percent is to get out of private mortgage insurance. But we’ve always had loans with 5 percent down.”

Check how much down payment you need to buy a house. Start here (Sep 16th, 2024)

Average down payment

Despite the myth that you need a 20 percent down payment, the average American becomes a homeowner with a down payment that is just six percent of the loan amount.

Down payments can be a very personal decision. The size of your down payment will be determined by your financial situation, including whether you want to pay a lower monthly payment, avoid private mortgage insurance, or finish paying for your house quicker.

Minimum down payment by loan program

Here is a look at the down payment options for each type of mortgage:

Conventional loans

You can get a mortgage through a lender that approves loans based on Fannie Mae and Freddie Mac rules – which is most lenders – with as little as 3 percent down. You must have a credit score of at least 620 and offer complete documentation of your funds, job, assets and credit history. By getting a conventional loan, you can avoid the higher-priced FHA loan mortgage insurance which continues the entire length of the loan. With a conventional mortgage, the mortgage insurance premiums stop once the borrower has accumulated 20 percent equity.

Three percent down payment conventional loans are out there. The down payment can be a gift from a relative or a community mortgage program.

“Just remember that the less you put down, the more you will be paying and the higher the interest rate. Conventional loans are very credit score-driven. A 3 percent conventional loan will have much more rigid standards than FHA standards,” she says.

With any mortgage, including a conventional loan, you will run into other expenses that add up to the price of buying a new home. The addition of closing costs, the appraisal, the credit report cost, the first year of insurance, taxes and inspection will cost about 2 percent of the entire purchase price. A conventional loan appraisal will run about $470 in her area, while an FHA appraisal which has a few more requirements, is $490. A home inspection which includes pest inspection can run from $350 to $450.

Check your mortgage rates. Start here (Sep 16th, 2024)

FHA loans

The Federal Housing Administration (FHA) backs loans with a down payment amount of as little as 3.5 percent. For an FHA mortgage, that money can be gifted, too, by a relative or through a down payment assistance program. An FHA mortgage loan is insured by the federal government, but not offered directly by the government. Instead, FHA-approved lenders offer loans based on FHA rules.

FHA mortgages have loan limits depending on where you live in the country. Additionally, FHA loans require a one-time upfront mortgage insurance fee plus mortgage insurance throughout the length of the loan or until the borrower refinances. The upfront fee can be financed into the loan.

Check your FHA eligibility. Start here (Sep 16th, 2024)

VA loans

This is a zero down payment mortgage, with no loan limits. These loans are guaranteed by the Department of Veterans Affairs and borrower eligibility is based on their military service. This loan program is an excellent home-buying option for qualifying borrowers since, in addition to no minimum down payment requirement, it offers lower interest rates and no mortgage insurance.

“This is a wonderful loan. People should use it and pay zero down, and use their money for something else like investments,” she says. “Many service people don’t even use their VA benefits. You can even get a VA loan even if you have a 55 percent debt-to-income ratio.”

VA rules state that veterans do not pay certain closing costs such as escrow fees.

Check your VA home loan eligibility. Start here (Sep 16th, 2024)

USDA loans

These loans allow 100 percent financing with no down payment through the Rural Development U.S. Department of Agriculture. The house you want to buy must be within an area designated in the program. Some of the eligible USDA loan houses are in subdivisions of big cities, too.

The program is income-driven, meaning you can’t make more than 115 percent of the median income in your household. This type of loan also allows for a gift down payment.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

Down payment assistance & first-time homebuyer programs

A recent analysis by the Down Payment Resource and RealtyTrac found 87 percent of the single-family homes and condos in the U.S. would qualify for a down payment assistance program. The average amount of down payment assistance across all counties is $11,565. More than 2,000 counties have more than 10 down payment programs available to prospective homebuyers.

If this is your first mortgage — or you haven’t had a mortgage in three years or more — then you may qualify for one of the hundreds of housing and community development nonprofits working to help people become homeowners.

Ready to become a homeowner?

Don’t let saving for a 20 percent down payment delay homeownership. A mortgage calculator can help you to understand how different down payment amounts will shape your monthly mortgage payment and speaking with a mortgage lender can help you to find the right mortgage program for you.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post How much is a down payment on a house? (FHA, VA, USDA, Conventional) first appeared on My Mortgage Insider.

The proposed $25,000 First-Time Buyer Home Act would help prospective home buyers purchase a home by helping them to fund a down payment.

The Act was originally introduced in 2021. It is still in the current administration’s budget proposal, however, it has not been enacted yet. That means it might undergo changes before becoming law, or it might not ever become law.

Still, here’s what we know about the $25,000 Downpayment Toward Equity Act as it stands right now.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What is the Downpayment Toward Equity Act?

The Downpayment Toward Equity Act of 2023 is designed to help “close the U.S. racial wealth and homeownership gaps by providing $100 billion in direct assistance to help first-time, first-generation homebuyers purchase their first home.”

If the program became law, financial assistance for qualifying prospective homeowners could include “assistance for down payments, closing costs, and to help buy down mortgage interest rates.” The assistance could total up to $25,000 per prospective home buyer.

The available information on the proposed act indicates the home buyer would receive the grant upfront, instead of as a tax credit. Since the grant proceeds would be awarded on closing, a mortgage lender may use this information as a part of their decision-making process for the mortgage loan.

Did the $25,000 first-time home buyer grant get passed?

As of January 2024, the Down Payment Toward Equity Act has not been passed. The bill was initially introduced in 2021 in the Senate. It is currently being considered by Congress, with no clear indication of how long it might take to become law.

However, in March 2023, the White House included this grant in its proposed budget for the fiscal year 2024. The budget allocated $10 billion for grants to benefit qualified first-time home buyers.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Who qualifies for the Down Payment Toward Equity program?

The Down Payment Toward Equity program is designed to help first-time, first-generation buyers purchase their first home. Given that, not everyone qualifies for this proposed grant.

If the Act passed in its current state, prospective homeowners would need to meet the following criteria to receive a grant:

• First-time buyers: To be considered a first-time home buyer, a borrower must not have owned a home for the last three years. This means prospective homeowners who sold their last place over three years ago without purchasing another property could qualify for this grant.
• First-generation homebuyers: The grant funds are specifically designed for home buyers whose parents’ never owned a home in the United States. If the home buyer lived in foster care, this requirement is waived. Also, this requirement is waived if the borrower’s parents default on a home loan and experience foreclosure.
• Income requirements: The program is intended for low-income and moderate-income borrowers. Prospective homebuyers must typically have a household income of less than 120% of the area’s median income. In high-cost-of-living areas, the income limits are higher and the borrower can earn up to 180% of the area’s median income and still qualify.
• Residency requirements: Borrowers who plan to use the grant funds to purchase a home must live in the home for at least five years. If the homeowner sells the home before the five-year mark, they will need to repay the grant funds.
• Property requirements: This down payment grant program is only available for real estate properties of one to four units. To purchase a multi-unit property, the homeowner must utilize at least one of the units as a primary residence.
• Housing counseling: A prospective borrower must take a homeownership education course that is approved by the Department of Housing and Urban Development (HUD) before receiving any funds.

Additional funds could be available for some borrowers

Eligible home buyers could receive up to $20,000 in grant funds for their new home purchase. Some specific borrowers may even qualify for extra money, up to $25,000 in grant funding.

To qualify, borrowers must make less than 120% of the area’s median income, or belong to a group that has been subject to racial or ethnic discrimination within the U.S.

Other down payment assistance programs for first-time homebuyers

The Down Payment Toward Equity Act hasn’t been passed yet. If the bill becomes law, it could provide a pathway to homeownership for many aspiring homeowners.

But if this bill doesn’t become law or you just don’t want to wait, there are other down payment assistance (DPA) program opportunities that could make homeownership possible.

Here are a few other first-time homebuyer programs available to first-time home buyers:

• Localized grants from government agencies: Some cities and states offer down payment assistance grant money for first-time home buyers.
• Forgivable loans: Some down payment assistance programs are available as forgivable loans, which means you’ll find a 0% interest rate, the balance is forgiven after a set period of time and no repayment is required.
• Government programs: The FHA loan program and USDA loan programs can offer flexible credit score requirements and low down payment options.

Take some time to explore all of your down payment assistance options as you begin your homeownership journey. If you meet the eligibility requirements, you could move forward with the home-buying process soon.

Check your FHA eligibility. Start here (Sep 16th, 2024)

$25,000 first-time home buyer grant FAQ

What is Biden’s $25,000 Down Payment Toward Equity Act?

Biden’s Down Payment Toward Equity Act is a down payment grant that offers a pathway to homeownership for first-generation home buyers. If the bill becomes law, qualified home buyers could receive up to $25,000 in grant funding for their home purchase.

Is Biden giving $25,000 to first-time home buyers?

The Biden administration included grants to first-generation, first-time home buyers in its proposed budget for the fiscal year 2024. It’s possible this cash grant program was included to make good on a campaign promise in a tight housing market with high rates. But the bill hasn’t become law yet, which means President Biden isn’t giving $25,000 to first-time home buyers as of writing.

Who qualifies as a first-time home buyer?

For the purposes of this program, a first-time home buyer is someone who hasn’t owned a home in the last three years.

When will the Downpayment Toward Equity Act pass?

Right now, there is no definitive indication about when — or if — the Downpayment Toward Equity Act will pass.

The bottom line

The Down Payment Toward Equity Act could offer a path to homeownership for many Americans. However, this bill isn’t the law yet. With that, prospective beneficiaries of the program will have to wait and see if the proposal becomes law.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post $25,000 Downpayment Toward Equity Act | What To Know first appeared on My Mortgage Insider.