How to Get the Best Mortgage Series  –  Week 3

Follow this series to learn how to get the best mortgage for your specific financial situation and goals. You’ll see what steps you need to take throughout this process to make it productive and successful.

This week you will learn about down payment options and how much cash you really need (or don’t need) to get the loan you want.

Not having a big down payment does not have to be the reason stopping you from a new home. The first myth that needs to be blown up is that you need a 20% down payment. That is so wrong! There are so many options that allow you to put less than 20% down. Some under-20% down don’t require monthly mortgage insurance! I can get you on the right track for what you need to do to make this happen.

It’s Not One-Size-Fits-All

The amount of your down payment actually depends on the type of mortgage you get. And that depends on your budget, your financial situation, and even the type of home you are considering.

That’s why it’s important to talk with a lender or lenders to go over all the loan programs they offer and to discuss your particular financial situation.

Remember, it’s not one-size-fits-all when it comes to mortgages, and you have your own unique needs and requirements. Certain lenders are a better match for you than others, so shop around.

Step By Step to Down Payment

You’ll be able to narrow down your own mortgage options, once you’ve determined what sales price correlates to your monthly budget.  And that’s why we covered the importance of your monthly budget in Week 2 of this  series.

Here’s the step-by-step process to get to your down payment:

Monthly budget — Correlating Sales Price — Mortgage Options — Down Payment

After you complete your monthly budget and get an idea of price correlation, you’ll have a better idea of what loan programs work for you and then how much money you will need for a down payment.

And sometimes, the amount of available cash you have for a down payment can lead you to certain loan product options.

Keep in mind that closing costs usually average about 3% of the purchase price, so you’ll need a little more cash for that as well.

Down Payment Options

There are pros and cons for each type of mortgage product.  Your lender can go over the details for each as it pertains to you. Remember some lenders work for a bank and only have access the loan products their institution offers. Some lenders work with multiple investors and offer multiple products. You’ll want to work with a lender that know what’s out there and can offer the best options for you. You may need to talk to a few lenders to find that out.

Here are some things to consider:

• Conventional loans may require 5, 10 or 20% down, depending on your credit score and other factors affecting your financial picture.  There are even 3% down options for some of you. 
• FHA loans can require as little as 3.5% down. But its fees and insurance may increase your monthly payments.
• If you are a veteran, you can put 0 down with a VA Loan.
• You may qualify for a down-payment assistance program. There are programs out there for moderate-incomes!

Many loan programs don’t require 20% down to avoid paying monthly Private Mortgage Insurance (PMI).  This series cover PMI and ways to avoid it in an upcoming article in our Mortgage Series. Stay tuned!

You’ll need to consider the possibilities and the financial impact with each loan option. I can help you review and discuss the options along with your lender.

Different for Every Buyer

Make sure you understand the correlation between your purchase price, monthly mortgage payments, and down payment. It’s all tied together and can be very different for each home buyer.

Don’t compare yourself with friends! How much you can put down and how much you need to borrow can affect what mortgage product and interest rate is available to you.

For example, if friends have more to put down, they might be able to buy a more expensive home than you. Or, on the flip side, if they buy a home priced the same as yours but put more down, they could get a better interest rate since the amount they need to borrow is smaller.

Why Not More Down?

Your parents and friends may tell you that you need to put 20% down.  Although they have the best of intentions, gone are the days of needing so much to buy a home. That is a myth.

Yes, a larger down payment will reduce the amount you have to borrow but it might not be the best option for YOU.

Here’s why this advice of a “larger down payment” isn’t always better:

Makes you fall into the trap of postponing homeownership until “someday” but someday never comes. Saving can take years to get a 20% down payment. It feels daunting and seems unattainable. You’ll end up delaying and delaying and miss out on opportunities that are out there right now.

Prices keep going up while you try to save more. The price of a home can go up faster than the rate you are saving. You’d be better off purchasing whatever you can afford with the lower downpayment you have now than saving for 2 more years and trying to buy the same home that has appreciated.

—–> For instance, if you purchase a $725,000 home today with 5% down ($36,250) at 6.85% your payment would be $4,513. Let’s assume interest rates stay at 6.85% and let’s assume home prices appreciate 5% each year (does that sound conservative?). In 2 years, that same home would cost $799,312. If you saved for 2 more years to get a 10% down payment, you’d need to save another $43,681 – that’s $1,802 month. So, if you saved for 2 more years to put a 10% down payment on the same house, your monthly payments would be $4,714. That’s $200/month MORE than if you’d purchased 2 years earlier with a lower down payment. Price appreciation really kicks you in shins if you aren’t an owner. On the flip side, if you were an owner, you’d be the lucky recipient of that appreciation.

You end up with nothing left in your savings account once you buy a home. Put down just enough to get a monthly payment that works for your budget right now.  Never put all of your savings into your down payment.  You’re going to need some cash flow for other investments, any emergencies, or the inevitable responsibilities once you’re a homeowner.

There So Many More Great Loan Opportunities Today.  Lenders are more willing to work with buyers since many restrictions on buyers have eased up. That means you’re more likely to be able to buy a home today with less money down and qualify for a mortgage. Also several lenders offer grant programs that help with down payment and closing costs.

Ways to Boost Your Savings

Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much cash you’ll actually need for your down payment.

No matter what, it’s a good idea to start saving. Here are some suggestions for ways to boost your cash flow (Remember to always consult with your tax advisor and financial consultant.):

• Borrow from your 401(k) Plan.
• Withdraw funds from your IRA or Roth IRA.
•  Gift from family
• Borrow from family or friends. Lenders will need to know this!
• Increase you tax refund by changing your withholdings
• Save, save, save. Deposit money in your bank account regularly.
• Cut back on unnecessary expenses.
• Sell stuff on eBay or Craig’s List or other resource.
• Consider a side hustle to earn some extra money.

If you want to buy a home, you don’t have to wait until you have a large down payment.  There are so many good options out there nowadays. You DON’T need 20% down!  Let’s have a coffee or a cocktail and see what’s possible for you.  There’s no harm in finding out about the options!