Down payment loans
It is not easy to pay cash to buy a house. You make a small down payment (generally 3-20% of the sale price). You get a bank loan for the rest. A home buyer must put down cash before qualifying for a mortgage. The house for example may sell for $100,000. The down payment (of $3000 - $20,000) is the amount of money a home buyer has to pay out of his or her own pocket.
Purpose of down payment:
The lending institution can recover the loan amount easily in case of a default. The home in question is used as collateral to secure the loan against default. The borrower may fail to repay the loan. The lender then can legally sell the asset. He can retain the amount to cover the loan. The sale proceeds at times may not cover the loan amount. The lender can use the down payment also to clear the loan.
How much do you have to pay as down payment
It depends on your credit rating and the kind of loan you propose to avail. There are three major kinds of mortgage loans. They require down payments at varying degrees. They are conventional, Federal Housing Administration (FHA) and Veterans Association (VA) mortgage loans.
Conventional mortgage:
The bank expects you to put at least 10% down.
They expect you at times to put down 20% or even as little as 5% if you are lucky. You might even manage to get a nil down payment loan with a near perfect credit. This concession will be available to a significantly higher income group than necessary to qualify for a regular loan.
F.H.A:
A first time home buyer might qualify for an FHA loan and put only 3% 5% down. The loan is still made by the bank and not the FHA. The FHA just guarantees a part of the loan. That means, if you fail to repay the loan, the FHA pays the bank. The bank will still take the house back.
VA:
A veteran might be eligible for a VA loan and put nothing down. The VA itself does not lend the money; it just guarantees part of the loan. Hence the lender is comfortable lending.
You must now pool your savings for a down payment. Do not borrow towards a down payment. It has to be your money. The bank thinks that you wont be able to pay back your loan if you take on additional debt.
How much can you put down if given an option:
Financial advisors say that 20% is the ideal number. This magical percentage allows you to avoid private mortgage insurance (PMI). A PMI boosts monthly payments. You must work out an affordable monthly mortgage payment. People usually turn to their parents, friends and other family members for help.
How good are the bigger down payments
a) You can qualify for a bigger loan from the bank.
b) You can qualify for a bank loan easily.
c) You might want to put down 20% or more. Then you wont have to buy private mortgage insurance (PMI) (which is a must for below 20% down payments). Mortgage insurance is costly. You would lower your monthly repayment further by avoiding mortgage insurance.
How unfavorable are the bigger down payments
a) Every dollar you put as a down payment is the money you cannot save or invest elsewhere. That again depends on the market conditions and interest rates prevailing for investment elsewhere. Mutual funds or stock markets could give you better returns. It is then better to put down less for mortgage.
b) Extra down payment is harder to get back if you ever need the money for an emergency. (You can always sell your mutual fund shares and convert them to cash any time). It depends on your life situations and goals in life.
What if you have no money or less money for down payment
There are very low down payment alternatives called
a) Private mortgage insurance;
b) Loans and gifts;
c) Down payment assistance programs;
d) Piggy back loans;
d) Dependence on 401k accounts.
Low down payments and mortgage insurance:
You may choose to put down lower than 20%. Then mortgage insurance is a must. It protects the lender against financial loss in case of default. This insurance in most cases costs 1.5 percent of your loan amount. The amount can be rolled into your mortgage. This PMI can be done in two ways, through government or through private sector. Government and private insurance are based on the same basic concept. They allow families to get into homes with less cash down. There are also differences between the two. This has to be ascertained before buying one of them to suit your needs.
Loans and gifts:
Home buyers must pay down at least 5% of a homes value to be considered for PMI. Some special programs let the buyers to use a gift or grant to cover 2% of the 5% required by private mortgage insurers. The gift or grant may come from a friend, relative, community group or other organizations. Alternatively, FHA loans are available for less than perfect credit. The FHA allows a down payment as low as 3%.They allows usage of gift funds for the down payment. The gift can be even from new innovative programs. These programs include Bridal Registry. Here couples receive money into the account. It is then used for down payment.
There are non-profit down payment assistance programs in order help low-income families. They gift funds to home buyers. This gift need not be repaid. The procedure involves having a home seller provide a home buyer with cash for down payment. A participating seller can potentially attract a large number of home buyers to his or her property. But a seller cannot directly give a buyer down payment money as per rules. Hence a third party must be involved. There are the administrators of such programs. They oversee the transfer of money from the seller to the non-profit organization. The organization in return gives the home buyer a comparable amount for down payment on the home. This gift is treated as down payment. He buyer has no part in the transfer of funds. He or she need not pay it back. However it is important to get confirmed that the non-profit organization with which you are dealing is an excellent one. Stay aware to any sign that the organization is giving kick backs to real estate agents, mortgage brokers or any one involved in the mortgage transaction.
Many local and state agencies run bond programs to generate funds to help individuals and families. The interest rate may be lower.
Borrow from your 401k program:
You can also borrow from your 401k program with your employer. You can withdraw with out penalty and pay it over a specific period. This is a smart move if this is your only option. You have to forego the income on the withdrawals. You also pay taxes and penalties on the amount withdrawn.
Piggyback loans:
This is the second loan closing at the same time as your first mortgage. This loan is combined with your down payment in order to reach 20% needed for conventional mortgage. You will have to repay two loans each month. Interest rate on the second loan may be higher than the first mortgage loan. But your monthly total payment may be less than paying for PMI. The interest on a piggy back loan may be tax deductible.
It is now up to you to choose among the options to suit your needs.
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