Coming up with a down payment to
purchase a home is difficult, especially for first-time buyers and
those with low incomes. Lenders recognize the struggle and are
willing to underwrite mortgages with smaller down payments than
were traditionally required years ago.
Most mortgage lenders will require a
cash down payment of 5, 10 or 20% of the purchase price of the home.
Some lenders offer zero-down mortgages. If you are able to put down
more than the required down payment, 30% for example, the lender may
overlook credit problems or allow you to apply without disclosing
your income. If you can't find 20% to put down on the mortgage, you
will be required to pay for private mortgage insurance, also called
PMI, to protect the lender against your default.
The idea behind down payments is that
the more cash you invest, the more interest you have in making the
payments on time and paying off the mortgage. The more you put down,
the less of a risk you are to the lender. You can lower your
mortgage payment or purchase a more expensive house by putting more
money down.
How down payments work
If you make $40,000 a year, you can
afford a maximum monthly mortgage payment of $933. That is 28% of
your gross income. Assuming your total monthly debt is less than
$1,200 (36% of your gross income, the more money you put down, the
more home you can buy.
For example, a 30-year fixed-rate
mortgage with a rate of 7.5% and a monthly payment of $933 equals a
principal of $133,435.45. If you put 10% down, you can afford to buy
a property worth $148,262. If you put 20% down, the house price
would be $166,794.
There are several calculators on the
Internet that will help you determine how much house you can afford
and the required down payment amount.
If you are selling your home, you can
apply the equity you receive as your down payment towards your next
home. Otherwise, you need to be prepared to show that you have had
your down payment in a bank account for at least 60 days.
If you start saving now and give up
the luxuries, before you know it, you could have enough saved up to
put down on a home. You could borrow against your 401(k) retirement
plan for your down payment. You will have to pay interest on the
loan, but it may be worth it. You can borrow from your family for a
down payment as well. You will need to sign a "gift letter" for the
lender that shows that the down payment is a gift, not a loan.
If you still aren't able to find
enough money for a traditional down payment, don't worry. There are
special mortgages and programs for first-time home buyers that will
help you buy your dream home.
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