Down Payment Requirements on Home Purchase

This guide covers the down payment requirements for home purchases. What are the down payment requirements on a home purchase? Unless mortgage borrowers qualify for a VA or USDA mortgage loan, there are down payment requirements on a home purchase. Besides the down payment requirements, lenders want to know how the home buyer is coming up with closing costs. There are certain states like Illinois where Illinois home buyers get property tax prorations by home sellers due to property taxes being paid in arrears. What this means is that the home seller owes the buyer the property tax credits.

Homebuyers in Illinois can use property tax prorations towards their down payment. However, they still need to show that they have the minimum down payment requirements on their home purchase. In this article, we will cover and discuss the down payment requirements on home purchase.

Closing Costs on Home Purchase

Closing costs can be covered in the following ways:

• Seller Concessions
• Lender Credit
• Home Buyers own funds
• Gifted Funds

Lenders Want Documents Sourced Funds For Down Payment And Closing Costs

The source of down payment and closing costs will be required and must be documented at the time of application. For conventional mortgage loan products, the minimum down payment requirements on a home purchase will normally be 5% normally. First time home buyers with higher credit scores can qualify for 3% down payment on a home purchase with conventional loans. FHA insured mortgage loans require down payment requirements on a home purchase to be 3.5% for those borrowers above a 580 FICO credit score. 10% down payment requirements on a home purchase for mortgage borrowers with under 580 credit scores with approve/eligible per Automated Underwriting System Findings. Closing costs on a home purchase varies from state to state and county to county. Normally, closing costs average around 3% of the purchase price.

Down Payment Requirements On Home Purchase Depends On Loan Program

As mentioned earlier, the down payment needs to be shown and documented at the time of the mortgage application and at the time of processing before it gets submitted to underwriting. All down payments need to be seasoned at the borrower’s bank account for at least sixty days. If it not seasoned for sixty days, it needs to be sourced. Mortgage Borrowers need to provide documentation where the deposit of the down payment came from. If it was from a sale of a car, a bill of sale and documentation is required to prove that the sale did in fact happened. Cash deposits without no paper trail are worthless and cannot be used. If it is an income tax refund check, the copy of the check and deposit slip will be required.

Gift Funds For Down Payment On Home Purchase

FHA and other loan programs allow gift funds from family members and relatives to be used towards the down payment on a home purchase. However, gift funds are not viewed as favorably. There are many times where the Automated Underwriting System will not approve a borrower with gift funds on a down payment on a home purchase if the borrower has lower credit scores

However, AUS may approve a lower credit score borrower where their down payment on a home purchase is not gifted. A creative loan officer can help borrowers get an approve/eligible with gift funds on a home purchase. There are certain tricks of the trade on how to make this work.

How Does Gift Funds For Down Payment Requirements On Home Purchase Work

This is how a gift letter from donors works: However, a gift letter by the donor is required stating that the gift funds are not a loan and are a gift and will not be paid back. The gift letter will be provided by the lender and needs to be signed and dated by the donor. The withdrawal of the money leaving the donor’s account into the recipient’s bank account is required along with a prior thirty-day history of the donor’s bank account.

AUS Conditioning For Reserves

There are instances where Automated Underwriting System Findings will ask for Reserves. Reserves are one month’s Principal, Interest, Taxes, Insurance (P.I.T.I). Gift Funds cannot be used for Reserves. Reserves need to be borrower’s own funds

Closing Costs And Down Payment Requirements On Home Purchase

If the real estate purchase contract is structured correctly, home buyers do not have to worry about any closing costs. FHA-insured mortgage loans allow up to 6% in seller concessions towards buyer closing costs. Conventional mortgage loans allow up to a maximum of 3% for owner-occupied properties and 2% seller concessions on investment homes. If homebuyers can get the proper amount in seller concessions where it can cover all closing costs, they do not have to come up with any additional cash for closing costs. VA Loans allows up to 4% seller concessions. Closing costs and escrows can be covered either with seller concessions and/or lender credit. The only thing that you need to worry about is the down payment

Borrowers need to show the 3.5% down payment on home purchases on FHA loans and 3% to 5% on conventional loans. Homebuyers in states like Illinois where property taxes are paid in arrears might not need the full 3.5% down payment to close the loan.  Remember that property taxes are paid in arrears in certain states, like Illinois. In states like Illinois where property taxes are paid in arrears,  home buyers will get property tax proration credits, which can be used towards the down payment on a home purchase. There are many times where home buyers walked out of the closing with money back from the sellers and the keys with zero money down where property tax proration credits were large. Borrowers who need to get qualified for a mortgage loan with a lender with no lender overlays, please contact us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

FAQ’s on Down Payment Requirements on Home Purchase

Below is a summarized list of common questions related to the downpayment of a home and the current practices in place as of March 20, 2025.

What is a downpayment?

• You pay a fraction of the total property price as a lump sum.
• This amount is typically expressed as a percentage of the total sum, and it decreases the total mortgage amount.

What is the standard downpayment?

• Traditional Loans: 5% to 20%.
• Typically, a 20% downpayment.
• For example, $60,000 for a $300,000 property of a house, removes the burden of private mortgage insurance (PMI).
• FHA Loans: A minimum of 3.5% translates to $10,500 on a $300,000 house.
• VA/USDA Loans: No downpayment is available for eligible applicants, including active-duty military members, active-duty military members, veterans, or people living in rural areas.

First-Time Buyer Programs

Depending on the lender and other programs, these programs enable 3% or less.

Is it possible to purchase a home with no down payment?

• It is possible if you are qualified for a VA or USDA loan.
• Several local or state-sponsored programs also provide downpayment loans or grants, effectively lowering your upfront cost-effectively lowering your upfront cost to zero.

What are the minimum down payment requirements?

This depends on the loan type:

• FHA: 3.5% (or 10% with a credit score between 500 and 579).
• VA/USDA: 0%
• Conventional: 3% sometimes, but 5% is more standard.  

Remember to confirm with your lender since credit score, income, and debt-to-income ratio are also relevant.

Why do lenders require a down payment?

• Down payments are required because they demonstrate financial commitment, mitigate lenders’ risk, and decrease the loan-to-value (LTV) ratio, which affects interest rates and PMI.  

Does having a bigger down payment help?

Yes, a higher down payment will:

• Instantly build equality in the home.
• Greatly lower monthly mortgage payments.
• Improve interest rates.
• Eliminate PMI for conventional loans with 20% or more down.

Can I use gift money for a down payment?

• Yes, most loan programs (FHA, conventional, VA) allow funds called gift funds from relatives, but you need a letter stating it is a gift and not a loan.
• Some programs may have restrictions, so check with the lender.

What if I can’t afford a down payment?

• Down payment assistance: Some states and non-profits offer Grants or low-interest loans (up to $15,000) to first-time buyers.

Explore Lower Down Payment Options

• Consider FHA (3.5%) or conventional (3%) options.
• Seller Concessions: Despite restrictions, sellers can help cover some of your costs (e.g., 6% of the price with FHA).

Does the Down Payment Impact Closing Costs?

• No, closing costs and down payments are separate.
• These costs (which range from 2–5% of the property’s value) cover fees such as appraisal, title insurance, or lender underwriting.
• Larger down payments may decrease the loan amount and reduce some fees paid.

How Do I Save Money for the Down Payment?

• Cut non-essential spending and set a strict budget.
• Put the funds into a high-yield savings account.
• Consider setting up an automatic savings plan/app.
• Consider selling items you no longer use or picking up side jobs.

Contact a mortgage lender or visit HUD.gov or VA.gov for the most accurate information. These resources offer up-to-date program information and rates. Is there anything else you want to explore?