Wednesday, 18 October 2017

How much do I need for a down payment and why more is sometimes better!

Written by Posted On Friday, 18 August 2017 14:02

What you need for a down payment depends on the mortgage program you decide on.

There are still a few programs out there that offer 100% financing, with no money down.  The two that I know of are VA loans for veterans and Rural Development loans.  So you can buy a home with no money to put down on the mortgage. And if you are really lucky you may be able to get the seller to pay closing costs. So what does that mean?

You want the seller to pay your closing costs. Your Michigan real estate agent can put in the purchase offer that you want the seller to waive tax prorations, or to ask for the seller to pay for the closings costs, and escrows, and pre-paids.  This can be from 1 - 6% of the purchase price depending on the type of mortgage you decide on.  What that means to you is that you could buy a home with no money out of pocket if you put no money down and asked for sellers to pay for the closing costs. Remember you may have to put some money down depending on the mortgage program you qualify for and decide on.

If you cannot qualify for a VA or Rural Development loan the next decision is how much to put down on a mortgage or what type of mortgage you qualify for. Sometime the more you put down on the mortgage the lower your interest rate.  Which could mean you could afford a bigger or more expensive home if you put a sizable amount of money down.

Also is you do not ask for the seller to pay your closing costs you could get the home at a lower price.  Remember that the seller is taking those closing costs out of his profit.  So if he was going to give you $7000 towards closings costs, you may have been able to buy that home for $7000 less.

It is a trade off.  If you do not have money saved and want to buy a home it is possible to buy now.  If you have money, or getting money soon, or can save money for down payment and closing costs... you can save yourself money on the interest rate and possibly the price of the home.  

.  Saving for the down down payment is an important of part of the home buying process.  Saving funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. By saving money for a down payment will help you determine how much of a house payment you can afford each month.  Even if you don't use your savings toward the down payment it is great to have a nest egg for the unexpected items of home ownership.  During this period you should round up your financial records, examine your spending habits, and set a budget you can live with. 

Setting a budget and house payment is the most important thing you need do to do before starting to look for a home.  Banks and lenders will usually loan you more than you can afford to pay each month.  You don't want to be house poor.  You want to be able to take vacations and enjoy life too. Remember, too, that the down payment is not the only up-front expense. An allowance for closing costs, home inspection, and homeowners insurance should also be included in your savings budget. 

How Much do you have to save for the down payment?

Back in the early if you had a good credit score you could buy a home with as little as no money down.  But those days are gone after the mortgage melt down and all the foreclosures that happened. Banks are much tougher and most require some down payment.  There is only two types of loans that you can buy a home with no money down.  (USDA rural housing loan & VA Loan).  Now you need at least 3 1/2% for a down payment on a FHA loan and 5% down on a conventional loan.  You may not even much for closing costs if the seller agrees to pay for part of them.

The down payment is usually expressed as a percentage of the total purchase price of the home.

The down payment varies depending on the lender, the type of financing and amount of money being lent. In the past, the typical down payment was 5%, 10%, 15%, 20%, but in recent years lenders have been willing to offer conventional financing with as little as 3.5% down.

What is PMI or Private Mortgage Insurance?

I want to talk a little about PMI because it may influence you how much to save. Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry PMI (private mortgage insurance). History has shown that there are more foreclosures when buyers put less money down. That is why banks require PMI insurance on loans that have less than 20% down. The PMI (private mortgage insurance) covers the loss if the buyer defaults on the loan.

This insurance protects the lender in case of loan default.  It is a monthly premium that is part of your house payment.

Gifts

How much money you need to buy your next Michigan home can be reduced by a gift from a relative with some loans.  The time required for saving for the down payment can be shortened by a gift. The gift may come from family member. Most times a friends or other sources cannot be used. Remember that lenders usually require a "gift letter" stating the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts and gift letters.. 

Closing Costs

In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, appraisal, loan fees, the survey, attorney's fees, etc. When you see your mortgage person get an estimate of your closing costs. 

Some buyers are surprised by the amount of the closing costs, which can easily run into a couple of thousand dollars. Remember, though, that closing costs can be negotiated to be paid by the seller. For example, you may agree to pay the full asking price in exchange for the seller paying all the allowable closing costs.   Lenders usually allow sellers to pay for closing costs up to 3% (FHA loan), 4% (VA loan) of the purchase price to be paid by the seller.  So if you do not have any money this is a great way to get into a home.

I hope this article on home buying and how much do I need for a down payment clarified some of your choices and why you might choose one option over another.  It doesn't matter if you are buying a lake home in Oakland County or a home in a subdivision these options pertain to them all.

So now you know how much money do you need to buy a home depends on 

     *  how much is gifted to you

     *  what type of loan you are getting

     *  how much of a down payment is required

     *  how much the seller pays of your closing costs

Saving for the down down payment could be quite easy.  So Email me today to help you pre-approved and pre-qualified for your new home.

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