Most people will say you need to have excellent credit and a big down payment in order to secure a large mortgage. The reality is that while having a big chunk of cash to put down on a house is nice, it is not always an absolute requirement. Here's what you should know if you are looking to take on a large mortgage.
Can I Get a Large Mortgage With a Low Down Payment?
It depends on where you live and how large we're talking. Any Federal Housing Administration or FHA loan up to the maximum county loan limit can qualify for only 3.5% equity in down payment. Bonus: Back in December 2016, the FHA approved higher loan limits beginning in January 2017 for many counties across the country.
Another program known for having low down payment requirements are VA loans. VA loans are available to veterans, active duty service members, National Guard members and reservists who meet the requirements of the Department of Veterans Affairs and have acquired a Certificate of Eligibility from the VA or their lending office. VA loans will also go up to the maximum county loan limit and can even go up to or over $1 million in home values.
The idea that you need a big down payment in order to secure a larger mortgage is simply not true. FHA loans do require mortgage insurance premiums, and VA loans have a guarantee fee, which will increase your closing costs. However, your down payment will remain minimal.
What's a Jumbo Mortgage?
Jumbo loans exceed the maximum county loan limits and are not bought and sold every day to Fannie Mae and Freddie Mac. That said, jumbo loans do require significantly higher credit scores, typically 700 or above, and at least 10% equity in down payment. Keep in mind that any loan with less than 20% equity in the property will be subject to private mortgage insurance. (Not sure where your credit stands? You can view two of your credit scores, with updates every 14 days, for free on Credit.com.)
Jumbo mortgage requirements are particularly relevant for those looking to buy a home in high-cost areas. For example, in California's Sonoma, Marin, San Francisco, and Alameda counties, the maximum loan limit ranges anywhere from $595,000 to $729,500, but there are home that easily go for well over that.
How Can I Put Together a Down Payment?
Acceptable sources of down payment funds can include:
- Gift funds from a relative
- Selling of personal property that can be documented and supported by third-party value pricing (i.e. Kelly Blue Book for a car sale)
- Withdrawals from retirement funds
Remember, you cannot use your income as a form of assets. Banks want to see that you have the ability to save money up on your own. For example, you cannot use money from your paycheck that you deposited five minutes ago as a down payment because the funds are not considered "seasoned." In order for these funds to be considered, they must have been in your accounts for at least 60 days to show the money was "saved."
Struggling to put together a down payment? You can find more ways to find extra funds here.
As always, if you are looking to buy a house, be sure to do some research beforehand. Figure out how much cash you really have by working with a lender and seeing what you qualify for now. Be sure, too, to carefully research how much house you can actually afford — and what a comfortable monthly mortgage payment would be. Also, work with that lender to develop a savings plan so you can qualify for your first mortgage or improve your current mortgage and financial situation.