Down payments can be intimidating, especially for first-time homebuyers. The most common statements around down payments echo in their minds “You must put down 20%” and “I make too much to qualify for down payment programs.”
For any first-time homebuyer, this makes purchasing a home seem daunting. Add to that the expensive home prices in Southern California, and some would-be buyers view homeownership as an impossible dream.
We are here to tell you that is not the case.
While it would be great, you do not need to bring $60,000+ to the table to purchase a home in Orange County. We work regularly with first-time homebuyers to make owning a home a reality.
The most important piece is that you understand how down payments are calculated. To help unveil the mysteries around down payments, we have put together a detailed guide of what you need to know about a down payment.
How is the down payment percentage calculated?
The down payment is based upon the amount of your loan or appraised value, whichever is lower.
How much do I need to put down?
If you have been wondering exactly how much you need to come up with for a down payment, you aren’t alone. This is typically the first question homebuyers ask when they meet with a mortgage professional.
The minimum down payment needed varies by loan type. Here is the breakdown for three common loan types:
Conventional mortgages (meaning it is not guaranteed by a government program) usually require a 20% down payment. However, there are special first-time homebuyer conventional loans that require a low as 3% - 5% down payments.
An FHA loan (which is backed by the Federal Housing Administration) requires a minimum 3.5% down payment.
The VA loan (backed by the Department of Veteran Affairs) does not require a down payment.
They do require a funding fee, which is a one-time fee paid directly to the Department of Veterans Affairs. The funding fee ranges from 1.5% to 3.3% depending on the down payment amount, and if the buyer has used a VA loan prior. VA loans are products only offered to veterans or current members of the military.
A simple example for down payments amount for a $300,000 purchase price house would break down to approximately:
- First-time homebuyer special conventional - $9,000 - $15,000
- FHA - $10,500
- VA funding fee - $4,500 to $9,900
What if I’m purchasing a home for more than the appraised value?
In a competitive market, you occasionally find sellers unwilling to budge on their listing price despite a lower appraised value. Other times buyers in a multi-bid situation will offer slightly above the appraised value to entice the seller to accept their offer. More often than not, it’s the final appraisal that comes in lower than expected.
For homebuyers using a mortgage to purchase a home, this situation creates a challenge. The majority of mortgage providers will not write a mortgage for more than the appraised value. As mentioned earlier, a mortgage provider will base the loan amount on the lower number between the purchase price and or the final appraised value, whichever is lower.
This leaves buyers to provide the additional funds out of pocket if they want to move forward with the initial purchase price.
*Note: NWOC down payment assistance programs will not work with buyers purchasing a home for more than the appraised value.
Can I use “Gift Funds”?
Your ability to save your own funds for a down payment gives a strong indication of your ability to pay your mortgage each month. In order to verify the source of your funds, mortgage providers will typically request two months of bank statements.
If the bank finds any large sums deposited within that timeframe, they will need to verify the source. Depending on the source, this can create challenges for the buyer qualifying for the loan.
Additional money contributed beyond the minimum needed amount can come from gift funds. Gift funds, as the name implies, is money given to you by another individual, such as family. Remember, though, that the down payment cannot come from another loan source - unless you are working with a qualified down payment assistance or other approved program.
General rule of thumb: Have your down payment in your savings account for 90 days prior. This way, you will have it listed for the three months the bank needs to review your statements.
Most homebuyers are familiar with the impact that a down payment has on mortgage insurance, which protects a lender in case a homebuyer defaults on a loan. The more uncommonly known fact is that the mortgage insurance requirements vary by loan type.
Conventional mortgages require mortgage insurance (MI) when the loan-to-value (your total loan amount compared to the appraised value of the house or the purchase price) is less than 20%. Mortgage insurance, when applied to a conventional mortgage, is most often referred to as private mortgage insurance (PMI) as it is provided through a 3rd party.
When your down payment equals or exceeds 20% of the value of the home, PMI is not needed.
However, there are special conventional loan programs that require as low as 3% down payment and do not require mortgage insurance.
With conventional loans, you can work with your loan provider to adjust the way that your mortgage insurance is factored in or applied throughout the duration of your loan.
Depending on how the loan is written, you may have the option of:
- Qualifying for a special loan program that does not require PMI;
- Eliminating PMI by accepting a higher interest rate;
- Eliminating PMI by paying higher closing costs;
- Paying the PMI insurance up front to eliminate the monthly fees.
Because FHA terms are more lenient, the loan is a higher risk product. To help offset the risk, FHA loans require mortgage insurance on all loans regardless of the down payment percentage.
VA loans do not have monthly PMI or MI requirements.
For some qualifying first-time homebuyers, there are down payment assistance that programs can help. These programs are designed to make buying a home more accessible to fist-time buyers through additional funds. These funds are grants, loan forgiveness, or simple fixed interest rates to supplement a first mortgage.
*Note: Not every mortgage provider will allow down payment assistance funds to be behind their mortgage product. At NWOC we have established a good relationship with multiple mortgage providers that are familiar with and allow our assistance programs to accompany their loan.
At NWOC we connect clients with various down payment programs for Orange County residents:
WISH or IDEA program (only one can be used)
The WISH program (Workforce Initiative Subsidy for Homeownership) is a grant that fully forgives funds after the recipient lives in the home for five years. Should the recipient move out before the five-year time frame, the funds are prorated with 20% forgiven per year lived in the property. Remaining funds will need to be paid back.
The WISH program matches funds the buyer brings to the transaction. They will match funds 3-to-1 up to a maximum of $15,000. For example, if you bring $5,000 to the transaction, WISH will match with $15,000. If you bring $2,000 to the transaction, WISH will only match $6,000.
The IDEA program (Individual Development and Empowerment Account) is very similar to the WISH program. Like WISH, it offers up to $15,000 in 3-to-1 matching funds to be fully forgiven after five years. IDEA is designed for buyers who have not prepared themselves to save the initial $5,000. IDEA works with them to implement a savings plan for ten months to help save the initial $5,000. Then when it comes time to purchase the home, IDEA matches 3-to-1.
CalHome is a gap loan with a 30-year term of up to $57,500. It is a 3% simple interest loan that will need to be paid back. The difference between the CalHome loan and traditional loans is that the CalHome product can defer payment and interest while the recipient is living in the home.
Other down payment programs
NeighborWorks Orange County also connects clients with down payment programs such as the Neighborhood Stabilization Program (NSP) and other products that are created as funding is available. To see the most up-to-date program availability, visit www.nwoc.org
Down payment assistance qualifications
Each program has differing qualifications. First and foremost, the buyer must be, in most cases, a first-time homebuyer and qualify for a first mortgage. The home must usually be the primary residence for the borrower(s). Typically, the programs prefer applicants with a 620 FICO score or higher, which must satisfy the 1st lender’s guidelines. Depending on the product, there may be certain requirements on the number of lines of credit in your report. Each program has varying lengths of time for a recipient to have recovered from a bankruptcy.
Down payment programs have differing income levels based on the number of people in the family. The income level is based on the household size compared to the Area Median Income (AMI) indicated by HUD each year. For example, applicants for the CAL Home program must have an income below 80% AMI. The qualifying income goes up as the household size increases. WISH income qualifications are slightly lower than CalHome’s, but you can get a general range based on CalHome’s numbers.
Here are qualifying income examples based on an 80% 2015 AMI:
- Household of 1 - $52,500
- Household of 2 - $60,000
- Household of 3 - $67,500
Additionally, programs such as NSP go up to 120% AMI.
Here are qualifying income examples based on a 120% 2015 AMI:
- Household of 1 - $78,700
- Household of 2 - $89,950
- Household of 3 - $101,200
There are different options when it comes to down payments as well as loan products. The more you can learn about your options, the more achievable homeownership will become.
If you are thinking about homeownership in the future, consider joining one of our Homebuyer Workshops. Our workshops are only $10 - $25 and will walk you through all aspects of purchasing a home. We leave no stone unturned and no question unanswered.
Know that when you go to purchase a home, you will be equipped with the most accurate and beneficial information, ultimately making your home-buying experience a positive one.
Our mission at NeighborWorks Orange County is to strengthen communities. One of the ways we achieve this is through creating innovative housing solutions and empowering families to successfully navigate the home-buying process.