How Will You Fund the Down Payment of Your New Home

How Will You Fund the Down Payment of Your New Home

One of the components a lender uses to help determine what loan amount to approve is your down payment. A down payment not only serves as a commitment on a borrower's behalf to make good on a loan, but also acts as a lender's guarantee to minimize risk in case a borrower defaults on a loan. The more of your own cash that you can put down for a loan, the easier it is to qualify for a higher loan amount or a lower mortgage payment.

One of the components a lender uses to help determine what loan amount to approve is your down payment. A down payment not only serves as a commitment on a borrower's behalf to make good on a loan, but also acts as a lender's guarantee to minimize risk in case a borrower defaults on a loan. The more of your own cash that you can put down for a loan, the easier it is to qualify for a higher loan amount or a lower mortgage payment.

Alternative sources of funding

Since most borrowers do not have large cash reserves on-hand for a down payment, there are other alternative sources for funding. Besides tapping into your own savings accounts, other resources may include relatives, 401(k) plans, proceeds from stock sales, appraised assets, even a co-signer.

Many cities, looking to expand their communities, even offer their own down payment subsidy programs for first time homebuyers. It's not uncommon to be gifted $5,000 to $30,000 without expectation of re-payment.

Loan-to-value ratio

A down payment is always expressed as a percent of the sales price and often referred to by lenders at the "loan-to-value ratio" or LTV. For instance, a $250,000 mortgage with an LTV of 80% would require 20% down or $50,000. Using a down payment calculator can help you see what influence a different down payment can have on your monthly mortgage.

Other down payment options

Some banks even offer zero-down percentage loans which require no down payment. These types of loans are typically directed at first-time buyers with good credit who are qualified to make the monthly payment but cannot come up with a down payment. However, without a down payment the buyer has no equity in the house and the lender is at greater risk, so the interest rate could be higher.

Another alternative to buying a home without committing to a down payment is to consider a lease option to buy. As a renter, you have an option anytime during the term of the lease to buy the property at an agreed upon price from the owner. In some instances, the money you've put toward rent can be fully or partially applied toward the down payment.

Sellers can also assist buyers with their down payment. By offering a carry-back mortgage, sellers can sell their house faster in a competitive market and buyers can purchase a home they otherwise might not be able to afford.

Image: Image courtesy of jk1991 at FreeDigitalPhotos.net
Mortgage Closing Costs

Mortgage Closing Costs

Once you've been approved for a mortgage, found a house, made an offer, and the offer has been accepted, you are close to calling your property home. What's left is to finalize the documents which will transfer ownership of the house from the seller to the buyer. The "close" or "settlement" usually involves the seller, real estate agent, lawyer, escrow agent, mortgage lender and buyer, and title company.

Once you've been approved for a mortgage, found a house, made an offer, and the offer has been accepted, you are close to calling your property home. What's left is to finalize the documents which will transfer ownership of the house from the seller to the buyer. The "close" or "settlement" usually involves the seller, real estate agent, lawyer, escrow agent, mortgage lender and buyer, and title company.

How the process works

The escrow agent and title company will present you with a variety of documents to examine and sign; title, insurance, escrow, and others - each with their own fees. Expect to pay 3-5% of your mortgage amount toward closing costs. Most fees are negotiable, with lenders picking up some of the costs upfront, while others require some costs to be paid by the borrower upfront, or built into the cost of the loan.

Settlement Costs Estimates

FEE - Average Cost(s)

Administration - $250.00

Application - $250.00

Appraisal - $300.00

Attorney fees - $300.00

Credit report - $25.00

Document preparation - $150.00

Escrow - $735.00

Fire insurance - $300.00

Flood certificate - $20.00

Hazard insurance - $300.00

Origination fee (points) - $2,500.00

Pest Inspection - $150.00

Private Mortgage Insurance (PMI)** - $2,500.00

Processing - $4,500.00

Recording fee - $475.00

Tax services - $60.00

Title examination - $150.00

Title insurance - $300.00

Underwriting - $300.00

TOTAL = $9,165,000 (3.66% of $250,000)

* Based on a $250,000 mortgage. Costs may vary by lender.

** If down payment is less that 20% of the loan amount.

For a description of the terms above, please see our mortgage glossary.

What is Private Mortgage Insurance?

Your lender may advise you to set up an escrow account should your down payment be less than 20% or if you're a high credit risk. Less money down means the greater the risk the lender needs to assume. So to guarantee your property tax payments and private mortgage insurance (PMI) premiums, a small percent of your mortgage will be set aside each month to cover your payments. Your PMI rate will vary based on the mortgage amount and covers the lender in the event you default on your payment.

Should you pay extra for points?

Should you secure a lower interest rate on your mortgage you can expect to pay a certain percentage to the lender in the form of points. Points or origination fees are what lenders charge in interest to reduce the rate of the loan. It can be paid upfront or built into the cost of the mortgage. One point is equal to 1% of the mortgage amount (e.g., one point on a $250,000 loan equates to $2,500) which goes to the lender at closing.

Read an article on whether or not it makes sense to pay mortgage points.

Image: Image courtesy of Stuart Miles at FreeDigitalPhotos.net
How Much Home Can You Afford to Buy

How Much Home Can You Afford to Buy

Knowing how much house you can afford begins by listing the type of features you'd like to have in a home. Your individual needs, location requirements, style and the amount of effort you are willing to put into finding your dream house, all factor into the equation. How important is it for you to be near a school? How long will it take you to commute to work? How much will you spend on gas to commute to work? How safe is the neighborhood? These are all legitimate questions that can help you choose your ideal home.

Knowing how much house you can afford begins by listing the type of features you'd like to have in a home. Your individual needs, location requirements, style and the amount of effort you are willing to put into finding your dream house, all factor into the equation. How important is it for you to be near a school? How long will it take you to commute to work? How much will you spend on gas to commute to work? How safe is the neighborhood? These are all legitimate questions that can help you choose your ideal home.

Have a range in mind before you go house hunting. What is the minimum and maximum amount you can afford to buy? Compare mortgage rates. For instance, if you're considering purchasing a house in the $200,000 to $250,000 range, a down payment of $20,000 could be the difference between an additional $200-$300 monthly on a higher priced home.

Why debt ratios are important to lenders

Your debt-to-income ratio is a simple way of showing lenders what percentage of your income is available for a mortgage payment after taking all of your other debt obligations into consideration. You may see conventional loan debt limits referred to as the 28/36 qualifying ratio with FHA and VA loan ratios typically running higher at 29/41. Both numbers are percentages that are used to examine two unique aspects of your debt load.

The first number, or the front-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses. This total includes payment on the loan principal and interest, private mortgage insurance (PMI), property taxes, and hazard insurance, collectively referred to as PITI, and homeowner's association fees, if any.

The second number, or the back-end ratio, indicates the maximum percentage of your monthly gross income that the lender is willing to allow for housing expenses plus recurring debt. This total includes credit card payments, child support, car loans, and other obligations that extend beyond 6-10 months to repay.

If you're unable to come up with a down payment to obtain a loan close to what you're paying for rent, then consider lowering your debts to decrease your back-end ratio to pre-qualify for a higher loan amount. However, depending on the lender, some have been known to approve back-end ratios as high as 60%. More aggressive lenders even offer 100% financing with no stated income, no ratio pre-determination, and no income verification mortgages.

Once you have an idea of how much additional debt you might qualify for, then you can experiment using a mortgage rate calculators by inserting different variables (e.g., expenses, credit card loan balances, down payments, etc.) to determine how much home you can afford.

Compare the best mortgage rates.

Image: Image courtesy of fantasista at FreeDigitalPhotos.net