How Much Do You Really Need For A Downpayment?

How to Get the Best Mortgage Series  –  Week 3

Follow this series to learn how to get the best mortgage for your specific financial situation and goals. You’ll see what steps you need to take throughout this process to make it productive and successful.

This week you will learn about down payment options and how much cash you really need (or don’t need) to get the loan you want.

Remember that 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 with alternatives to paying monthly mortgage insurance. I can get you on the right track for what you need to do to make this happen.

It’s Not One-Size-Fits-All

The amount of your down payment actually depends on the type of mortgage you’ll get. And that depends on your budget, your financial situation, and even the type of home you are considering.

That’s why it’s important to work with a Loan Officer that will go over all the loan programs they offer and to discuss your particular financial situation. This is what I can help you with!

Remember, it’s not one-size-fits-all when it comes to mortgages, and you have your own unique needs and requirements.

Step By Step to Down Payment

You’ll be able to narrow down your own mortgage options, once you’ve determined what sales price correlates to your monthly budget.  And that’s why we covered the importance of your monthly budget in Week 2 of this  series.

Here’s the step-by-step process to get to your down payment:

Monthly budget — Correlating Sales Price — Mortgage Options — Down Payment

After you complete your monthly budget and get an idea of price correlation, you’ll have a better idea of what loan programs work for you and then how much money you will need for a down payment.

And sometimes, the amount of available cash you have for a down payment can direct you to certain loan product options.

Keep in mind that closing costs usually average about 3-4% of the purchase price, so you’ll need a little of your cash for that as well.

Down Payment Options

There are pros and cons for each type of mortgage product.  I can go over the details for each as it pertains to you. Remember, not all lenders offer the same products and programs, which is why it is good to do your research and find the one that matches your needs best. We participate in a lot of the first time home buyer programs, but there are many banks and lenders that do not.

Here are some things to consider:

•Conventional loans may require 5, 10 or 20% down, depending on your credit score 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 with a VA Loan.

•If you are purchasing a home in a rural area, you may be eligible for a USDA loan with 0% down. Income limits apply.

• You may qualify for a down payment assistance program. There are programs out there, so ask me if you are eligible for any of these additional incentives!

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

You’ll need to consider the possibilities and the financial impact with each loan option. I can help you review and discuss the options with you.

Different for Every Buyer

Make sure you understand the correlation between your purchase price, monthly mortgage payments, and down payment. It’s all tied together and can be very different for each home buyer.

Don’t compare yourself with friends! How much you can put down and how much you need to borrow can affect what mortgage product and interest rate is available to you.

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 may have a better interest rate, pay less in mortgage insurance, and may have a lower monthly payment than you.

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. You can 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.  You’re going to need some cash flow for other investments, any emergencies, or the inevitable responsibilities once you’re a homeowner.
3. There So Many More Great Loan Opportunities Today.  With new products and programs becoming available, we can be more flexible with a solution that works for your long and short term financial goals. That means you’re more likely to be able to buy a home today with less money down and still qualify for a mortgage. Ask me about the grant programs that help with down payment and closing costs.

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.

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.

 •Gift from immediate family.

•Increase you tax refund by changing your withholding exemptions from 1 to zero.

•Save, save, save!

•Cut back on unnecessary expenses.

•Sell stuff on eBay or Craig’s List or other resource. Be sure to document any sales.

• Consider a side job to earn some extra money.

If you want to buy a home, you many not have to wait until you have a large down payment.  There are so many good options out there nowadays, even it you don’t have 20%.  Reach out to me at mccall@youragentmccall.com so I can see what’s possible for you.  There’s no harm in finding out about the options!