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How Much Do You Really Need for a Down Payment

mortgageSeriesWeek3How to Get the Best Mortgage Series  – Week 3

Follow our new series to learn how to get the best mortgage for your specific financial situation and goals.  Well take you through each and every step to learn:

  • What you need to do before, during, and after the entire mortgage process to make sure you are getting the right program.
  • How to get the lowest interest rate possible.
  • What to ask your lender before you buy a home (its not a pre-approval!).
  • How to avoid PMI.

This week youll learn about your down payment options and how much cash you really need (or dont need) to get the loan you want. A down payment does not have to be a roadblock to homeownership – there are so many options these days that allow you to put less than 20% down and not pay monthly mortgage insurance!  Heres your chance to find out what you need to do to get on the right track.  You’ll be surprised how a down payment is no longer holding you back! 

It’s All About the Loan

The amount of your down payment actually depends on the type of mortgage you’ll get. That’s why it’s important to meet in person or at the very least talk on the phone with several different lenders to go over all the loan programs they offer and to discuss your particular financial situation. Remember, it’s not one-size-fits-all when it comes to mortgages.

Once you have an idea of what sales price correlates to your monthly budget then you’ll be able to narrow down your mortgage options. Once you do that you’ll have a better idea of how much money you will need for a down payment. Keep in mind that closing costs usually average about 3% of the purchase price, so you’ll need a little of your cash for that as well.

Here are some options:

  • Lenders of conventional loans may require 5, 10 or 20% down, depending on your credit and other factors affecting your financial picture.  There are even 3% down options for some of you!
  • FHA loans can require as little as 3.5% down.
  • If you are a veteran, you can put 0 down.

There are pros and cons for each mortgage and your lender can go over the details for each as it pertains to you.

These days, many buyers don’t have to put 20% down to avoid paying monthly Private Mortgage Insurance (PMI).  Well cover PMI and ways to avoid it in an upcoming article in our Mortgage Series.

You might be able to qualify for a FHA mortgage at 3.5% down, but maybe its fees and insurance will drive up your monthly payments. You’ll need to consider the possibilities and the financial impact with each loan option.

All Together Now

Make sure you understand the correlation between your purchase price, monthly mortgage payments, and down payment. This is different for every home buyer and makes getting a mortgage not a one-size-fits-all experience. That’s why you need to spend time talking to a lender and getting a sense of what options are available for you and your specific financial situation.

For example if friends have more to put down, they might be able to buy a more expensive home than you. Or, on the flip side, if they buy a home priced the same as yours but put more down, they could get a better interest rate since the amount they need to borrow is smaller. It all ties together but can be very different for each borrower!

Why Not More Down?

Your parents and friends may tell you that you need to put 20% down.  Although they have the best of intentions, gone are the days of needing so much to buy a home, especially your first home!

Yes, a larger down payment will reduce the amount you have to borrow but it might not be the best option for YOU.

Here’s why this advice of a “larger down payment” isn’t always better:

1)  Makes you fall into the trap of postponing homeownership until “someday” but it’s never today. Saving to have enough money in the bank for a 20% down payment can be daunting and seem unattainable. You’ll end up delaying and delaying and miss out on opportunities that are out there right now.

2)  You end up with nothing left in your savings account once you buy a home. Put down just enough to get a monthly payment that works for your budget right now.  Never put all of your savings into your home to get to 10% or 20% down.  You’re going to need some cash flow for other investments, any emergencies, or the inevitable responsibilities once you’re a homeowner.

3)  You have the wrong impression of the lending environment in today’s market.  Lenders are more willing to work with buyers since many restrictions on buyers have eased up within the last year. That means you’re more likely to be able to buy a home today with less money down and qualify for a mortgage that you might not have back in 2014. Also several lenders offer grant programs that help with down payment and closing costs.

4)  You don’t realize that you may qualify for a home buyer assistance program. Not knowing about first-time buyer programs from state and local programs can be a huge mistake. You might need to use less savings than you thought. These programs offer down payment assistance (and may cover closing costs) for many moderate-income buyers in DC, VA, or MD so you’ll need less cash.No one should turn down free money, and we can give you all the details about income levels, locations, and more for these programs.

Ways to Boost Your Savings

Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much cash you’ll actually need for your down payment. So no matter what, it’s a good idea to start saving. Here are some suggestions for ways to boost your cash flow (Remember to always consult with your tax advisor and financial consultant.):

  • Borrow from your 401(k) Plan.
  • Withdraw funds from your IRA or Roth IRA.
  • Withdraw funds from Roth IRA.
  • Gift from immediate family of up to $12,000 per year per person
  • Borrow from family or friends.
  • Increase you tax refund by changing your withholding exemptions from 1 to zero.
  • Deposit $$ in bank regularly
  • Sell stuff on eBay or Craig’s List.

Stay tuned!  Next week, the fourth installment of our “How to Get the Best Mortgage” series will cover the topic, “How Your Credit Impacts Loan Options.” This is important to know and well show you how you can make sure you dont hurt your score.