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“Down payment”: It’s amazing that these two little words have such a profound influence on your home ownership process—and your life! Ask most people what is an acceptable down payment on a house, and nine times out 10 they’ll tell you it’s 20% of your home’s selling price. So you do the math, figure you’d have to put down $50,000 on a $250,000 house, and break out in hives when you realize that the chances of your getting out of that tiny one-bedroom apartment are slim.
Well chin up, buckaroo. That 20% figure is common, but it’s not set in stone. Sure, there are many reasons why you should make a 20% down payment on a house, but most banks will allow you to put down less—and yes, you can put down even more if you’re feeling flush.
Let’s take a look at the pros and cons of making a number of different down payments on a house.
It might sound like a huge chunk of change, but you’ll ultimately end up paying less if you make a 20% or higher down payment on a house. That’s because when you put 20% down, you won’t have to pay mortgage insurance, which can add several hundred dollars a month to your house payments.
“Mortgage insurance exists because the lender … assumes additional risk when a homeowner’s equity stake is small,” mortgage banker Craig Berry explains in The Mortgage Reports.
Both private lenders and the Federal Housing Administration have mortgage insurance plans. No matter which you chose, you’ll likely have to pay a one-time fee upfront and then another amount of money that will be tacked onto your monthly mortgage.
The only good thing about mortgage insurance is that it doesn’t last forever. When your loan-to-value ratio is 80% (or you have paid the equivalent of 20% of your home’s value), you can ask your lender to stop charging you for the insurance. Once the loan-to-value ratio reaches 78%, the lender is legally obligated to cancel it.
Another advantage of making a 20% down payment on a house is that that’s often the magic number at which point you’ll get a more favorable interest rate. So you can see the various advantages to saving up for that 20% down payment if it’s possible.
If you are unable to make a 20% down payment, there are many lenders that will allow you to make a smaller down payment on a house. Among them is the FHA, which offers mortgages with as little as 3.5% down, if your annual income is under a certain amount that varies by market. There are even some lenders, like the U.S. Department of Agriculture, that allow you to put 0% down, but eligible homes are usually in rural areas, and your income must meet certain low requirements.
Although you can find decent terms when you put less than 20% down, remember that since you’ll be financing a greater amount, no matter how favorable the terms you negotiate, your payments will be higher and you’ll be paying more interest, so the home will ultimately be more expensive.
People who inherit a windfall sometimes choose to put more than 20% down, so their payments will be lower and they can avoid mortgage insurance payments. But others, with very low credit ratings, are required by the lender to put more than 20% down. According to Robert Berger in U.S. News & World Report, if your credit score is under 620, you’ll probably have to put more than 20% down to get a conventional loan.
There is a surprising amount of down payment and home loan assistance out there for those in need. It comes in the form of low-interest-rate loans, grants, and tax credits. According to Sean Moss of downpaymentresource.com, in some cities you can get as much as $100,000 in assistance for purchasing your first home.
Of course, most of these programs depend on factors like your income, a maximum home price, and even your profession. For example, government employees in the Washington, DC, area may be eligible for $10,000 in down payment assistance, and teachers in Los Angeles and Orange County, CA, can get up to $15,000 to help them with their home purchases. Ask your real estate agent about these types of programs that you are eligible for.
For most people, a home is the biggest financial commitment they’ll make, but don’t let that intimidate you. If you’re serious about owning your own place, there are lots of resources out there to help make this into a reality.
Source: Realtor.com – What Is the Standard Down Payment on a House? Author: Lisa Johnson Mandell
One of the most basic equations you can use to figure out home affordability is your debt-to-income ratio. This is essentially a way for you (and lenders) to compare how much money you make with how much you owe—and how a house can fit into that picture.
As a general rule, your debt-to-income ratio should remain below 36%, says David Feldberg, broker/owner of Coastal Real Estate Group in Newport Beach, CA.
Here’s how to figure it out: Calculate how much you’re paying in debt per month—that’s things like car payments and college loans. Then divide that amount by your monthly income. Let’s say, for instance, that every month you’re paying $500 to debts and pulling in $6,000. Divide $500 by $6,000 and you’ve got a debt-to-income ratio of 0.083 or 8.3%. That’s well below 36%, but then again, you don’t own a home yet.
Once you know your income and debt, you can plug those numbers into a home affordability calculator to see how much home you can afford while still remaining below that 36% debt-to-income threshold. Let’s take the aforementioned example where you make $6,000 a month and pay $500 in debts. Now let’s assume you’ve got around $30,000 for a down payment and can get a 30-year fixed-rate mortgage at a 5% interest rate. So this will put you in the ballpark of affording a home worth $248,800.
So what does this amount to, month to month? To know that, you’ll want to factor in more than just your mortgage. There are other expenses, including property taxes and home insurance. Add those in, and you’ll be paying about $1,573 for the privilege of owning this house.
Of course, these numbers will change with your circumstances. Let’s say you got a raise and now make $8,000 per month. Take those same numbers above (a down payment of $30,000 on a 30-year fixed-rate mortgage at 5%) and you’d be able to afford a home worth $274,600, with a monthly housing payment of $2,073. Or let’s say you make $8,000 per month and are able to whittle your debt in half, down to $250 per month. That would mean “how much home” you can afford is in the area of $313,100, with monthly payments of $2,201 per month.
As you can see, when you’re trying to figure out how much home you can afford, the details matter, so be sure to take all of them into account. In other words, don’t look at just your salary, or just how much your mortgage payments will be. The clearer the picture you have of your financial commitments, the easier it will be to figure out how much home you can afford without getting in over your head.
Source: Realtor.com How Much Home Can I Afford? Find That Magic Number Here by Cathie Ericson
Photo by LinkedIn Sales Navigator on Unsplash
Your mortgage isn’t the only cost that goes along with buying a home. You’ll also be responsible for purchasing a homeowners insurance policy and paying property taxes. Depending on the kind of mortgage you’re getting and your lender’s requirements, these costs may be added on to your monthly loan payment.
With homeowners insurance, it’s common for buyers to pay the first year’s premiums in advance. If you’re not budgeting for these costs ahead of time, that could throw a wrench in your home buying plans.
Source: SmartAsset – Questions First-Time Homebuyers Forget to Ask
Typically, when your offer is accepted, the seller expects you to pony up a deposit as a sign of good faith. This earnest money is usually around 1% to 2% of the purchase price, but the actual amount can vary.
Aside from knowing how much earnest money you’ll need, it’s also important to find out whether you can get your deposit back if the deal falls through. If you don’t include a clause in the contract stating that you have a set amount of time to retrieve your earnest money, you may forfeit the cash if you decide not to purchase the home.
Source: SmartAsset – Questions First Time Homebuyers Forget to Ask
Photo by Nik MacMillan on Unsplash
Once you find a home you love, the next step is to make an offer. If you’re represented by a real estate agent, this is something they can assist you with. In their offer letters, many buyers focus on the deal they can get on the purchase price. But it’s also a good idea to be clear on what concessions, if any, you plan to ask for.
For example, you may want the seller to chip in a certain amount of money toward the closing costs. If the seller agrees, that’ll affect how much money you’ll need to bring to the closing table. Asking about concessions before you have a contract in place can keep you from being caught off guard down the line.
Source: SmartAsset – Questions First Time Homebuyers Forget to Ask
Photo by Jeremy Yap on Unsplash
When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.
“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”
Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.
But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.
“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”
A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.
“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”
A pre-approval letter is the real deal, a statement from a lender that you qualify for a specific mortgage amount based on an underwriter’s review of all of your financial information: credit report, pay stubs, bank statement, salary, assets, and obligations.
Pre-approval should mean your loan is contingent only on the appraisal of the home you choose, providing that nothing changes in your financial picture before closing.
“This makes you as close to a cash buyer as you can be and gives you a huge advantage in a competitive market,” says Lea Lea Brown, a vice president and mortgage banker with Atlanta-based PrivatePlus Mortgage.
In fact, pre-approval letters paired with clean contracts without tons of contingencies have won bidding wars against all-cash offers, Brown says.
“The reliability and simplicity of your offer stand out over other offers,” Brown says. “And pre-approval can give you that reliability edge.”
So take notice, potential home buyers. While pre-qualification can be helpful in determining how much a lender is willing to give you, a pre-approval letter will make a stronger impression on sellers and let them know you have the cash to back up an offer.
Source: Realtor.com – Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference? – Author: Lisa Gordon
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