How Much Money Do I Need To Buy A House?

One of the most frequently asked questions we get at Capital Lending Network (CLN Mortgage) is how much money do I need to buy a house? Most Americans can easily afford the monthly payment on a new housing payment. However, coming up with the down payment and closing costs is the issue most potential homebuyers face. Many renters do not even consider buying a home because they believe you need tons of money saved to even think about buying a house. In this blog, we will cover the most frequently asked question of how much money do I need to buy a house. You will be surprised at the answer.

How Much Money Do I Need To Buy A House? Cost Breakdown To The Road of Homeownership

Two types of costs required for a home purchase are down payment and closing costs for home buyers.

Two types of costs required for a home purchase are down payment and closing costs for home buyers. There are Down Payment Mortgage Guidelines for home buyers. Down Payment Mortgage Guidelines depends on each individual mortgage program:

  • Homebuyers do not have to worry about closing costs
  • This is because buyers can get a seller concession from a home seller to cover most or all of home purchase closing costs
  • Also, a home buyer can get a lenders credit towards a home buyer’s closing costs if they are short on closing costs
  • For a slightly higher mortgage rate, lenders can extend borrowers credit to cover the home buyer’s closing costs
  • However, down payment is a different story
  • Unless getting approved for a VA loan and/or USDA loan, home buyers will need a down payment for a home purchase

In this article, we will discuss and cover Down Payment Mortgage Guidelines On Home Purchase.

Down Payment Guidelines On Government And Conventional Loans

VA loan programs and USDA loan programs do not require down payments:

  • Minimum down payment requirements for conventional loans is a 5% down payment
  • Fannie Mae just launched a 3% down payment for first time home buyers
  • The Federal Housing Administration requires a 3.5% down payment on FHA loans
  • Borrowers need credit scores of 580 or higher
  • Borrowers with credit scores of under 580 need a 10% down payment to qualify for FHA loans
  • Reason lenders require down payments is because they want home buyers to have skin in the game
  • If the buyer does not put any money down and when things go bad for them financially, it is easy for them just to pack up and move on

However, if a home buyer has money of his own as a down payment, they will not want to lose it and will do everything possible to save their home or try to sell their home in order to get equity back.

Advice On Coming Up With Down Payment For Home Purchase

Down Payment Mortgage Guidelines state that home buyers need to come up with a down payment. Closing costs can be covered by sellers with sellers concessions or lenders with a lender credit. Thousands of folks are able to afford a home purchase and its monthly housing payments. However, lack of the down payment to go from a renter to a homeowner may be a hurdle:

  • No matter how much these folks make, they have a hard time saving for a down payment for a home purchase
  • Fortunately, there are ways of coming up with a down payment if they are creative

We will cover ways of coming up with a down payment for homebuyers in this article.

Down Payment Mortgage Guidelines On Gift Funds

Both conventional loan programs and FHA loan programs allow for gift funds from a family member. Relatives can gift buyers a down payment on a home purchase per Down Payment Mortgage Guidelines. HUD, the parent of FHA, allows a family member and/or relative of the home buyer to gift 100% of the down payment for a home purchase. Conventional loan programs allow a percentage of the down payment to be gifted by a family member and/or relative. Any gift for conventional loan programs that is under 20% down payment is allowed. But 3% of the down payment needs to come from the home buyer’s own funds. A gift letter needs to be signed and dated by the donor.

Donor Need To Sign Gift Fund Letter Provided By Lender

Gift Letter needs to state gift funds are not a loan and do not need to be paid back. 30 days of bank statements are required by the donor of the gift showing that the gift funds have been seasoned. The funds leaving the donor’s account and deposited into the recipient account are required. Cash gift funds are not allowed. Any cash funds cannot be sourced and do not exist nor count in the mortgage industry.

Down Payment Mortgage Guidelines: Using Funds From Selling Large Ticket Items 

Another way of coming up with a down payment for a home purchase is to sell large ticket items. Borrowers can sell a car, boat, jet skis, jewelry, or other large ticket items and use those proceeds towards the down payment as long as it is sold. Cannot sell a high ticket item on eBay and get cash for it and use that towards the down payment. All high ticket items sold need to be documented. Cash deposits cannot be sourced. Therefore, cannot be used towards down payment unless it has been seasoned in the bank account for 60 days.

How Much Money Do I Need To Buy A House: Case Scenario Of Verified Assets

For example, here is a case scenario:

  • the borrower has a boat they are selling
  • get the payment with a check and/or cashier’s check
  • make a copy of the check and/or cashier’s check
  • get a copy of the bill of sale
  • get a copy of the title transfer
  • get a copy of the deposit slip
  • Then this transaction is sourced and can be used towards the down payment

Also take a photo of the high ticket item, a copy of ads, and any and all documentation pertaining to the transaction.

Using IRA As Source For Down Payment For Home Purchase

Many folks do not realize that they can use their IRA and/or 401k retirement account towards the down payment of their home purchase.

Many folks do not realize that they can use their IRA and/or 401k retirement account towards the down payment of their home purchase. If willing to tap into a retirement account to be a homeowner and exhaust part of retirement funds, this can be an option. Taxable distributions from IRA may be exempt from cashing in IRA before being 59 1/2 years old from the 10% penalty. requirement, not taxes, as long as they are a first-time home buyer per IRS code. As long as the home buyer did not have an interest in a principal home during a 2 year period from the date of acquisition of a home.

Using Retirement Accounts For Funds For The Down Payment

A home buyer may still be eligible to take money out of his or her IRA even if they were previous homeowners but not recent homeowners in the past 2 years. Check with the IRA account executive and/or accountant on this. The exemption and no penalty distribution is capped at $10,000 per person who is qualified which included both home buyers, husband, and wife as long as they are first-time home buyers. Before borrowers act on this, make sure to thoroughly review the IRA statement and terms of the agreement and consult with a professional to make sure.

How Much Money Do I Need To Buy A House? Borrowing Against Your 401k Retirement Account

Many home buyers who have 401k accounts can borrow against their 401k via the 401k plan administrator and pay themselves back instead of doing a withdrawal against their 401k.  Those borrowing against their 401k retirement account plan often times will help the borrower exempt from tax penalties on the withdrawal of the funds.

How Much Money Do I Need To Buy A House For The Down Payment

Large deposits as sources for the down payment on home purchase need a paper trail in order to be used.

The two things needed on a home purchase are the following:

  1. Down Payment
  2. Closing Costs

Both the Sources For Down Payment On Home Purchase and closing costs need to be verified and need to come from qualified funds. Closing costs are normally not an issue. In this article, we will cover and discuss Sources For Down Payment On Home Purchase.

How Much Money Do I Need To Buy A House For Closing Costs

Most homebuyers do not have to worry about closing costs when they are purchasing a home. Closing costs can be covered in two ways if the borrowers do not have money for closing costs:

  1. Sellers concessions
  2. Lender Credit

Sellers Concessicons To Cover Closing Costs On Purchase

Sellers are allowed to give sellers concessions towards home buyers closing costs. The amount of seller concessions depends on the loan program.

The following seller concessions are permitted:

  • FHA allows up to 6% sellers concessions
  • USDA permits up to 6% of sellers concessions
  • VA Loans allows up to 4% sellers concessions
  • Fannie Mae and Freddie Mac allow up to 3% sellers concessions on primary owner occupant properties
  • 2% on investment homes
  • Non-QM Loans allows up to 6% of sellers concessions
  • Jumbo Lenders allow up to 3% in sellers concessions

How Much Money Do I Need To Buy A House? Using Lender Credit Towards Closing Costs

In the event, if the home buyer cannot get a seller’s concession or may be short of closing costs, the lender can give the borrower a lender’s credit towards closing costs. The lender credit is given in lieu of a slightly higher interest rate.

All Funds Needs To Be Verified

All funds that will be used for the down payment and/or closing costs on home purchase need to be verified funds by the underwriter. If there is a large increase in the borrower’s account or if the account was recently opened, the borrower must provide a credible explanation and documentation to source large deposits for all transactions. A large deposit is considered the lesser of:

  • Deposit that resulted in an increase greater than 25% of the borrower’s gross monthly income; or
  • A deposit that is more than 2% of the sales price

How Much Money Do I Need To Buy A House? Loan From Family For Down Payment

Gift Funds are allowed on mortgage transactions. FHA allows 100% gifted funds by a family member for a home buyer to use for the down payment and/or closing costs. Here is how gift funds work:

  • Gift funds are not viewed favorably
  • Gift funds need to be by a family member

Definition Of Family Member

The family member is anyone who is related to the borrower by law, marriage, or blood.

Here is how Family Member is defined:

  • Child
  • Parent
  • Grandparent
  • Foster parent and/or grandparent or step-parent or step-grandparent
  • Brother and/or stepbrother
  • Sister and/or stepsister
  • Adopted children
  • Aunt and/or Uncle

Using Retirement Accounts To Be Used As Sources For Down Payment

Retirement Accounts can be used as verified funds for the down payment and closing costs on the home purchase.

Here is how it works:

  • Borrowers can borrower from the IRA/401K
  • The monthly payment on borrowed amount is not included as debt and not calculated in DTI Calculations
  • Up to 60% of assets of IRA, Thrift Saving Plans, 401k, and Keogh accounts may be included in the underwriting analysis and sourced as verified funds

Sale Of Personal Property For Down Payment

The borrower must provide a satisfactory estimate of the value of the items and evidence that the items were sold

The borrower may sell personal property such as cars, recreational vehicles, stamp or coin collections, or baseball collections subject to the following: 

  • The borrower must provide a satisfactory estimate of the value of the items and evidence that the items were sold
  • The value estimate may be in the form of:
  • Published value estimates issued by organizations such as automobile dealers or associations related to the asset type, or
  • A separate written appraisal by a qualified appraiser with no financial interest in the transaction
The lower estimated value or the actual sales price may be used as assets to close.

Sources For Down Payment On Home Purchase On Secondary Financing 

Secondary financing is permitted to finance closing costs and down payment provided: 

  • The borrower is qualified with the debt as a long term obligation
  • The lien is secured by the subject property and subordinate to the first lien
  • Down Payment Assistance Programs (DAP) are permitted. Loans with credit score <620 are restricted to a maximum 45% DTI Ratio

Government Entity Guidelines On Sources For Down Payment On Home Purchase

Federal, state, local government, and nonprofit agencies considered instrumentalities of government are allowable sources for providing funds to cover the borrower’s minimum down payment.

  • An FHA approved mortgagee or FHA approved non-profit on behalf of the Government Entity may also provide the funds, as long as the subordinate lien is held by the Government Entity prior to submission of the file for FHA endorsement

Documented evidence that the Government Entity providing the required down payment is a HUD allowable source must be provided, as follows: 

  • If funds are provided prior to or at closing:
  • a gift letter and canceled check, evidence of wire transfer, or other draw request evidencing that the Government Entity had the authorization to provide the funds is required as proof of legally enforceable liability or obligation

If funds are provided before closing:

  • verification of fund transfer is not required if a gift letter and documentation of a legally enforceable liability or obligation is provided

Secured Loans For Sources For Down Payment On Home Purchase

Proceeds from a loan secured by financial assets such as stocks, bonds, Certificates of Deposits, or real property may be used for the total required investment. The assets securing the loan may not also be used as an asset for qualifying purposes.

Seller And Interested Party Contributions Sources For Down Payment On Home Purchase

Contributions by an interested party may not exceed 6% of the property’s established reasonable value.

Seller concessions include, but are not limited to the following: 

  • Prepayment of the buyer’s property taxes and insurance
  • Gifts such as a television set or microwave oven
  • Payment of extra points to provide permanent interest rate buydowns
  • Provision of escrowed funds to provide temporary interest rate buydowns
  • The payoff of credit balances or judgments on behalf of the buyer

Seller concessions do not include payment of the buyer’s closing costs or payment of points as appropriate to the market.  Funds derived from Premium Pricing are not included in interested party contributions unless the credit exceeds the actual closing costs/prepaid.

Unacceptable Sources For Down Payment On Home Purchase

  • Unsecured loans
  • Cash advances on credit cards
  • Borrowing against household goods and furniture
  • Other unsecured financings

Start The Mortgage Process Today With A Lender With No Overlays

Borrowers who need a direct lender with no lender overlays on government and conventional loans and need to get qualified for a mortgage please contact us at Capital Lending Network, Inc. at 262-627-1965 or text us for a faster response. We are available 7 days a week, evenings, weekends, and holidays. Or email us at gcho@gustancho.com.


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.