Your Savings and Down Payment

When preparing to buy a home, the first thing many homebuyers do is look at real estate ads or read how-to articles. However, the next thing you should do—before you call on an ad, before you talk to a REALTOR®, before you shop for interest rates—is look at your savings. Why? Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home, including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.

 

The size and source of your down payment directly impacts your mortgage options:

 

• If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages.
• If someone is giving you a gift for all or part of the down payment, your options are also limited.
• If you have enough for the down payment but need the lender or seller to cover all or part of your closing costs, this further limits your options.
• If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.

Of course, if you have enough for a large down payment, then you have lots of choices, including conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, and graduated payment mortgages.

 

You need to have at least some idea of your down payment when shopping for interest rates.

 

• Some loan programs charge a slightly higher interest rate for minimal down payments.
• The interest rates for different loan programs (e.g., conventional, VA, and FHA) are not the same.

If you shop lenders by phone, the loan officer can tell you which programs fit. If you are shopping on the Internet, you have to develop some idea of your loan program on your own.

 

Your down payment affects how you write your offer to purchase a home.

 

• You are required to put your down payment information in the offer, and different loan programs have different rules that affect the offer, which is especially important with FHA and VA loans.
• If you are asking the seller to pay all or part of your closing costs, you must be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments.

Finally, your down payment affects your ability to qualify. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.

 

As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can—when you get ready to take action—the first thing you should do is figure out how much money you have available for the purchase.