Down Payments

If you’re planning to buy a home in the near future, you’re probably already in the process of saving up for a down payment. But if you haven’t seen a mortgage advisor or started looking at properties yet, you probably don’t have a good idea of what a down payment will cost you. Different mortgages have different down payment requirements, and you’ll need to figure out ahead of time how much of a down payment you need to put forward.

Following are some general guidelines. Be sure to speak with a knowledgeable, local lender to get the best advice for your area

How can you calculate what you’ll need for a down payment?  Here’s what you need to know.

Look at What the Lenders Are Asking For

When it comes to down payments, you’ll need to take into account what lenders want to see. A lender wants to know that you can afford the home you’re planning to buy. That’s why a sizable down payment looks great on a mortgage application.

Although you can pay as little as 5 percent down, a 20 percent down payment looks better on paper. It also means you don’t have to get private mortgage insurance, which will save you money in the long run on a conventional mortgage.

Use Your Debt-to-Income Ratio as a Guideline

Your debt-to-income ratio is a measurement that you can use to determine what kind of a mortgage you can afford. Your down payment will be subtracted from your total mortgage, and it’s your monthly mortgage payment that will determine your debt-to-income ratio.  As a general rule, your non-mortgage housing expenses (or your back end ratio) should probably account for no more than 28 percent of your before-tax income.  With all housing costs included (mortgage or rent, private mortgage insurance, HOA fees, etc.) most lenders are looking for the debt-to-income ratio (the front end ratio) of 36 percent or less.

Lets say for example, you want to get a $300,000 mortgage amortized over 25 years and you expect to make a $25,000 down payment, your monthly mortgage payment will be approximately $916.67. To afford that mortgage payment, you’ll probably need to have a total before-tax household income of around $3273.82 per month. But if you were to increase your down payment to $50,000, your monthly payment decreases to about $833.33 making the debt-to-income ratio lower if you made the same amount of money.  

Doing the Math: Down Payment Requirements for Various Specialty Mortgages

Although there are certain laws around how much of a down payment you’ll need, in some cases the rules are different. The Veterans Affairs office provides mortgages through private lenders designed specifically for active military service people, veterans, and their spouses. A VA home loan requires zero down payment for loans that are within the maximum conforming loan limit, with a 25% down payment on the difference if you opt to buy a house worth more than the loan limit.

Your down payment size will influence a variety of other factors, like your mortgage terms and whether lenders are willing to give you a mortgage. A mortgage professional can help you understand the nuances of down payments. Check with your trusted mortgage advisor to learn what will for your particular situation.

A new house is a major investment. Even if you have a mortgage, the bank and the seller will still expect a sizeable down payment. That’s why lots of people regularly gift down payments to friends and relatives – it’s a great way to help young people start out on the path of home ownership.

But what are the rules around gifting down payments? Can you simply give someone everything they need? Although it’s a generous thought, it’s not always possible – here’s what you need to know.

Make Sure You Write a Gift Letter

If you’re giving one of your relatives money for a down payment, you’ll need to accompany the money with a gift letter. A gift letter is a letter written to the mortgage company that clearly asserts the money is a gift, not a loan. There are several key components that mortgage companies need to see on a gift letter, so make sure you have everything they need.

You’ll need to include your name, address, and phone number, as well as your relationship to the homeowner and the amount of the gift. Your letter should list the date on which you gifted the money and clearly explain that you do not expect to be repaid. Finally, you’ll need to include the address of the property being purchased and then sign the letter.

Tell Your Relatives to Pay the Right Down Payment Amount

When your relatives give their down payment, they’ll want to ensure they pay the right amount from their own money to ensure they don’t run afoul of any mortgage laws. In a conventional mortgage agreement, the borrower can pay the entire down payment with a gift if their down payment is worth at least 20% of the purchase price. If the down payment is for less than 20%, then the borrower can use gift money, but must also put forward a certain minimum amount that varies by loan type. For mortgages insured by the Federal Housing Administration or the Department of Veteran Affairs, the rules are slightly different.

Giving the gift of a mortgage is a great way to help friends or family members become homeowners. But with mortgages, there are strict rules around gifts. Contact your trusted mortgage professional to learn more about giving the gift of a mortgage.

If you’re looking for a new home, you’ve probably heard lots of advice about down payments. About how it’s okay to just have a five percent down payment – you’ll still get approved. About how you should make the down payment as small as possible to avoid cash flow problems.

In truth, you’re actually better off making the largest down payment you can possibly afford. Even if you have to slice up other areas of your budget, save for a few more years before you buy, or take a second job on the weekends, it’ll be worth it in the end. Here are just four reasons why you should make the largest down payment possible.

You Can Avoid Useless Insurance Premiums

Although you can buy a house with as little as a five percent down payment, it’s in your best interest to make a much larger down payment if you can. Mortgage insurance premiums can be as high as one percent of the loan’s value, which means until you’ve invested 20 percent of the home’s value in equity, you’ll have to pay an extra one percent every year. If you pay at least 20 percent of the purchase price upfront, you’ll be able to avoid having to get private mortgage insurance – so you keep more of your money in your own pocket.

You’ll Pay Much Less Interest

The less you have to borrow, the less you have to pay back – for more reasons than one.

When you take out a mortgage, the interest rate applies to the principal amount that you owe – and over time, the interest can run on top of interest, quickly outpacing the original sum. Having a larger down payment means the interest applies to a smaller sum. And that means it accumulates slower and ends up being a smaller amount over time.

You’ll Have More Ammunition In A Bidding War

Offering up a larger down payment is also a great way to make sure you get your dream house, especially if it’s a popular property with multiple offers. The seller isn’t just going to consider who offers the most money – they’re also going to consider which buyer is most likely to get a mortgage. After all, failing to get a mortgage is one of the most common reasons why real estate deals fail.

If you can show that you’re able to make a larger down payment, you’ll have a better shot at getting a mortgage – and that means sellers will prioritize you over other buyers.

You’ll Get A Great Start On Building Equity

Your home equity is equal to the difference between your home’s fair market value and the amount of debt invested into the home. If you don’t have enough equity in your home and home prices in your neighborhood fall, you may find yourself in a situation where you owe more money on your home than it’s worth – a phenomenon known as negative equity. By making the largest possible down payment you can, you’ll have a great head start on building your home’s equity – which may help you profit if you decide to sell in the future.

Buying a house isn’t easy, but making the largest down payment you can afford will give you a great financial head start on home ownership. Want to learn more about how to afford the home of your dreams? Contact your local mortgage professional today for practical advice to help you maximize your down payment.