The Low Down on Down Payments

Determine Your Down Payment

Don’t make the mistake of looking at all your assets and concluding that’s how much you have for your down payment. First, set aside 2 to 5 percent of the purchase price for closing costs. Then, set aside an additional $5,000 to $10,000 (depending on where you live) for relocation expenses, moving costs, furniture and short-term improvements, and unforeseen costs.

Now you have a better picture of how much you can afford to put down.

Minimum Down Payments

Depending on your situation, you’ll need to put anywhere between 3 to 20 percent down. However, there are certain mortgages that don’t require a down payment at all. Any conforming loans (more on conforming and non-conforming loans below) will require you to purchase separate Private Mortgage Insurance (PMI) if you put down less than 20 percent. You pay this premium to a private insurer, and in case you default on the loan, the lender is protected.

Fund Seasoning

When it comes to making your down payment, you must have a paper trail that documents the source of the funds. The funds can come from many sources: Maybe you inherited a large sum of money, received a particularly big bonus, or were gifted money from a relative—most likely, you scrimped and saved. In order to legitimize the money and avoid raising questions, you need to season these funds.

Seasoned funds are monies that have been in a legitimate account that belongs to you for more than 60 days. Seasoning your down payment is as easy as it sounds—deposit all the down payment money into one account at least 60 days before you close. That 60-day grace period without any changes to your credit is enough to put lenders at ease that the money is yours and came from a legitimate source.