Your Down Payment

Your Down Payment

What you have available for a down payment will affect the type of mortgage you can obtain and the interest rate you will receive. Down payments usually range from 0 to 20 percent of the new home’s sales price. In recent years, approximately one third of home buyers did not put any money down on the purchase of their new home. Nearly one half put less than 5 percent down. Obviously, those statistics demonstrate that the ability to buy with little cash is an important driving force in the housing industry.

Buyer Dont's

But there are drawbacks to buying with zero down. First, you will be forced to pay a higher interest rate. Zero down buyers with good credit generally pay an interest rate that is ¼% to ½% higher than those who are paying at least 20% down. Plus, a zero down buyer will either have to pay either mortgage insurance or else a higher rate on a second mortgage. Zero down buyers with below average credit face even greater charges and will often pay a 1% to 2% higher rate, but they can usually avoid mortgage insurance (MI) because lenders that lend to buyers with less than stellar credit rarely require MI.

The two most important factors that affect your financing rate and fees are your down payment and your credit score. If you have a perfect or near perfect credit score and a large down payment, you can expect to get the best rate and terms the marketplace has to offer. However, as your down payment diminishes and your credit score deteriorates, so, too, will the mortgage terms that you will be offered.

How do you amass a down payment these days when there doesn’t seem to be any money left over at the end of the month? Here are some methods that might help increase your down payment:

Save it

Well, of course that one is a bit obvious, but it can be done because saving is often more discipline than anything else. There are a lot of folks who spend whatever income they have without ever saving much. But you can look for ways to reduce your monthly expenses in order to save money.

Some folks have a difficult time distinguishing between needs and wants. Do you really need that mocha latte from Starbucks, or is a regular black coffee good enough? Can you get by with just the basic cell phone, or must you have the one with all of the whistles and bells? Americans could take a lesson from immigrants, some of whom really know how to save. Most loan officers will be able to tell you stories about immigrant couples who had below average incomes, yet had somehow managed to save huge down payments.

Borrow the down payment from your retirement plan

Check your retirement plan’s provisions. Borrowing from a 401(k) plan for a down payment or making a withdrawal from an Individual Retirement Account (IRA) is permissible. Just be certain you understand the tax consequences, repayment terms and early withdrawal penalties.

Move to cheaper quarters

You may be able to save substantial funds by moving into less expensive housing while saving up funds for your new home. Some young couples move in with their parents in order to save. You will have to make tradeoffs, but less money going towards rent can mean more going into the bank account

Get a debt consolidation loan

Paying off credit cards will eventually reduce your monthly expenses, but if you owe a lot, it will take quite a while. A better idea might involve a debt consolidation loan. Consolidate your credit card debt and auto loan into one low monthly payment and put the difference toward your down payment. Just be sure you discipline yourself to bank the monthly savings.

Wheel and deal with the seller

Sometimes you can convince the seller to carry a second mortgage to cover your down payment. However, many lenders frown on this scenario, so it can limit your financing options. Make sure your mortgage lender is okay with it

Sell some investments or assets. A lot of folks will sell stocks, bonds or that ‘63 Corvette that’s in storage. It may hurt to part with that old roadster, but this is all about tradeoffs.

Get a second job to increase your earnings. Again, remember to bank that extra income.

Skip a vacation or two. Getting away is nice, but saving requires sacrifice. Vacations can be expensive, and skipping them will really pump up the bank account.

Gifts from Family. Parents and other family members are often anxious to help children buy their first home and may have the means and inclination to give you a gift for part or all of your down payment.

Down payment assistance plans (DAP). Some mortgage programs will allow the seller to contribute toward your down payment by giving the funds to a non-profit agency that simply turns the money over to you in the form of a gift. It’s a loophole that some lenders will accept. The non-profit agency will charge a small fee for its service.