As a borrower, a lender will expect you to make a personal investment in the property you are buying that you want the lender to finance. Understandable in this era of high default rates. If you have money in the property you are less likely to simply “walk away" if the loan becomes too burdensome down the road. This is your down payment. The old way was to save up 20% down in cash and get a mortgage for 80% of the sales price. With high real estate prices today, coupled with most families now having two incomes rather than just Dad's to pay the loan, lenders now require less of a percentage down. This article covers various down payment resources you may not have considered or even known about!
The more cash you can put down, the better. It makes the loan smaller and therefore easier to qualify for. And the money you put down does not disappear into a “black hole"! It is now equity in your property and can be accessed in future through sale or refinance of the property. The smaller the loan, the smaller the monthly payment, too. However, you probably should not scrape your savings barrel dry to make your down payment. Many lenders will want to see bank statements showing that after the loan has closed you still have a couple months’ mortgage payments left in the bank. The borrower who can demonstrate their disciplined savings over time is also showing a prospective lender that they probably have the discipline to budget properly and are a better risk and more likely to make their loan payments on time in future.
Down payment funds do not, however, necessarily have to come from your savings, accumulated over a long time. Here are some other acceptable resources for obtaining those funds:
- Sell other assets such as automobiles, snowmobiles, Jet-skis, boats, motorcycles, etc.
- Receive a gift of funds from relatives or friends.
- Look into government or private DPAP's - Down Payment Assistance Programs that gift you the needed funds
- Sell off investments - coins, stamps, antiques as well as stocks & bonds
- Borrow or withdraw funds from your 401-k retirement fund. (Penalties apply to early withdrawal)
The one thing you may NOT do is borrow the down payment money. That would be debt and mean you were not putting any real money of your own into the loan. In addition, any funds you acquire through the above or other means must be “seasoned" by having been on deposit in your bank account for at least 2 months. So if Mom promised to help you buy a house, get her to deposit the funds into your savings account before you even begin to house hunt so the funds can “season. "
Do not lie or fudge to the lender about gift funds. They are acceptable, just do not try to pretend they were savings you had under the mattress, etc. Gift funds become your own money and are just as good as savings for purposes of down payment.
Government down payment assistance programs usually restrict you to being low-income or limit the areas in which you may purchase a home. They may require you to complete courses on home ownership, budgeting, etc. They may be contributory, i. e. , for every dollar you save the government adds two dollars.
Private DPAP's usually are non-profit organizations. The seller “donates" the down payment to them and then they gift it back to you. The seller gets a charitable tax deduction for his donation, which they would not have gotten if they had simply dropped the sales price. A seller may not give money to a buyer to assist with the down payment requirement. A seller may, however, concede or pay some or all of the closing costs and this can get a deal done that otherwise could not have been done.
FHA loans require as little as 3% buyer down payment, depending on your credit score. If you are a military veteran or currently in the military you may qualify for little to no down payment with a VA loan.
Remember that in addition to your required minimum down payment, there will be closing costs on the loan. Closing costs, as a rule of thumb, usually run about 3% of the sales price. If the seller is not helping out with the closing costs you will either have to have funds for those in addition to your down payment, or you will have to seek a “no closing cost" loan and those loans will carry higher interest rates and require that your personal credit be pretty good.
If none of these options are viable for you, you may be better off waiting and continue to save. Don't rush to buy and get in over your head. That's how a lot of foreclosures get started.
As always, the guidance of an experienced mortgage professional can be invaluable.
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://swifthussherrealestate.com which James also runs!