Though there are many important first time home buyer requirements, perhaps the most significant is the down payment, or the DP. The down payment is important for any purchase, not only a first time buy.
A general rule of thumb to remember is that the higher your investment is, or the greater your down payment, the less risk there is to the lender. The optimum down payment is 20% of the sales price, since at this percentage Fannie Mae feels that you will not default.
If a particular loan happens to be outside of the Fannie Mae limit, it is up to the individual lender to set up a minimum down payment. Typically, the down payment will then be higher then 20%.
On the other hand, if the down payment were less then 20% you would have to purchase insurance to cover the lender in case of default. The minimum down payment to qualify for a Fannie Mae loan is 5%. The money used for the down payment has to come from the borrower’s “seasoned” funds, meaning the money has been in the borrower’s account for at least 60 days.
In some situations, the money for the down payment can also be borrowed; if this is so, documentation needs to be provided that demonstrates the terms of repayment. If the terms of repayment cannot be demonstrated the bank will most likely deny the loan. The bank’s logic for doing so is that any additional loan that you have will affect their calculation of your fiscal ability to repay.
It is, however, permissible for the source of the down payment to be a gift from a family member. Certain guidelines dictate this process, which are best communicated by a loan officer or the particular bank that you are dealing with. For a down payment of less than 20%, at least 5% of is has to come from your “seasoned” funds. However, if your down payment will be more than 20% the full amount can be received as a gift.
As always, we suggest that you get together with your mortgage consultant as early as possible in this process to discuss your options.