Home Buying and Down Payments –show Me the Money!

In a perfect world, every buyer would apply 20% of the purchase price toward a down payment on a loan transaction. They would have 720 credit scores and have worked at the same company (which they do not own themselves) for the past 10 years. They pay their credit card balances off every month, own their car outright, and have a savings kitty equal to their yearly income. Trust me, these people do exist. We lenders just don’t see them every day. But doing a loan for these individuals is a walk in the park.

Most of us try to save what we can. That’s important when buying a home. However, many mortgage products allow for varied down payment options from 20% down plus closing costs to coming to the table with no money at all.

To come to the table with no money at all, you must either be a first time homebuyer or your income is under a certain mandated amount. These programs are designed to boost the home buying segment of our population and allow modest income receiving individuals to be homeowners. Providing they have a good credit and work history and haven’t owned a home in the past three years, they are perfect candidates for 100% financing. If the value of the property allows it and the seller is willing, oftentimes the seller can contribute anywhere from 3-6% if the closing costs. Mortgage insurance (MI), incorporated into the monthly payment, will be required by the lender, and normally it’s at a reduced rate. If you’re income is below a certain level, you can deduct the mi from your taxes. That’s how you can show up, buy a house and put no money down.

The next common tier for consideration is a 3% investment. An FHA loan is the first product that pops into mind when hearing the 3% thresh hold, however there are conventional products that also allow this minimal investment, too. Again, mortgage insurance will be required regardless of the chosen product, but other factors such as credit score and loan amount must be considered when deciding if this a good fit for you.

With recent changes in the industry, a 5% down payment is the most typical rule of thumb for no strings attached financing that one sees today. When I say no strings attached, I am talking about applying the most encompassing guidelines or umbrella under which the largest segment of homebuyers can fit – self employed, stated income, etc., included. The widest cast net, if you will. And, the mortgage insurance requirement will still apply.

If you can come up with a 10% down payment, you can probably avoid mortgage insurance by financing another 10% of the purchase price with a subordinate, second loan. Lenders refer to it as an 80-10-10 loan. That means a base loan amount of 80% of value, a second loan of 10% of value and the remaining 10% down payment comes out of your pocket. If your income is above a certain level, this route is attractive because it allows the consumer the benefit of writing off interest on the second loan since they can’t write off mortgage insurance. You can also come up with more than 10% down payment and obtain the appropriate secondary financing to hit that 80% threshold that avoids mortgage insurance.

Why wouldn’t you always put all of your savings toward a home? Because your money may be spent or invested elsewhere and serve you better. For instance, if you qualify for a first time homebuyer program and have $1000 that you had tucked away for a down payment, you could finance the entire purchase price of the loan at a 6% interest rate, your realtor can negotiate with the seller to pay a portion of the closing costs and in turn, you could eliminate that nasty credit card debt that you are paying 13.9% interest on. Make sense?

Of course, your mortgage lender should be able to assist you in examining and choosing which down payment is best or perhaps, necessary for you. Be forthcoming about your goals and needs, and the down payment question should be easily answered.