Home : The Top 5 Things You Should Know About Down Payment
The Top 5 Things You Should Know About Down Payment
Just when us lenders thought we defeated all those mortgage myths floating around out there, a new study from Ellie Mae showed us they’re still out there flexing. According to the 2018 Borrower Insights Survey by Ellie Mae, a striking 48.6 % of the renters thought they needed 20% or more for down payment. That’s simply not true, but this study signals that there is a lack of education out there for potential home buyers, particularly around down payment. So here are 5 things you should know about down payment.
20 % isn’t required but there are perks
It’s an old school myth that you need 20% to buy a home. Although it’s not necessary, there are a few benefits that you can expect when you offer the larger down payment. Here’s a list of my favorite perks:
- Lower Monthly Mortgage Payment
- A Lower Interest Rate
- No Private Mortgage Insurance (PMI)
- Immediate Equity in your new home
Those are nice perks, but that doesn’t mean that you should miss out on the opportunity to buy now. There are many advantages right now, such as a low market interest rates and the ability to build equity through the appreciation of your house.
Down payment varies but you may be able bring as little as 3% or maybe even 0%
For most borrowers buying 1-unit primary homes, you can expect your minimum borrower contribution (or minimum required investment) to be 3%, 3.5% or 5% depending on the loan program. Here’s a breakdown of loan types by down payment percentage:
- FHA: 3.5 % down payment
- Fannie Mae Home Ready/ Freddie Mac Home Possible: 3% down payment
- Conventional: 5% Down Payment
There are also additional categories of loans such as VA (for Veterans) or USDA (Rural) loans which are 0% down payment. Each of these programs have different guidelines and every case is different, but your lender should be able to help you determine which program you qualify for.
The source of your money matters
“So, I can’t just take the cash I’ve been saving under my mattress all this time to closing?” No, unfortunately you can’t. Assets, like everything else in your application, must be documented properly. Here are a couple common issues to start preparing for when you lender needs to source your assets:
- Large Deposits — Any deposit, excluding your employment income, greater than 1% of the sales price or 50% of your monthly qualifying income. Some lenders and investors have stricter requirements. Here’s a tip: Ask your lender to “back out” the unsourced funds, if you don’t need them. This reduces your assets by the amount of the unsourced portion.
- Gifts — If you intend to use a gift, then you’ll have to provide the appropriate gift documentation. Also, your lender will have to verify the source of funds in your donor’s account. Make sure your donor is okay with this and confirm that they don’t have any unsourced funds that will require documentation.
Down payment assistance (DPA) is available
There are quite a few programs out there that can help you, but like the old saying goes, “There’s no such thing as a free lunch.” These programs come with strings attached and qualifying for them can be tricky. However, if down payment is your only barrier to buy, then you can benefit from using from these programs.
First, let’s go over the requirements. In my experience, qualifying typically boils down to these four criteria:
- First-Time Home-buyer — Read the program’s description because it may be broader than our textbook definition.
- Credit score — You are required to have a score at or above or certain number.
- Household Income Eligibility — Your household income is the combined income of all people who will live in the household with you. The limit can vary depending on your household size or the location of the program. You must fall within the limit to qualify.
- Debt to Income (DTI) Ratio — The program may have a requirement that your debt to income ratio cannot exceed a certain limit, and it is typically lower than the maximum ratio allowed to you if you get the loan without assistance.
Now, let’s go over what it’ll cost you. You can expect one or more of the following:
- A higher interest rate set by the down payment program
- Repayment of the borrowed money when you sell or refinance your property
- Paying to take a home-buyer education class through the institution
- An origination fee charged as a requirement for the assistance
Despite the costs, down payment assistance is a great way to help offset the upfront expenses of buying a house, but down payment isn’t the only money you need to bring to closing.
You’ll have to budget for closing costs
“Down payment is only part of the total cash to close, you also have closing costs.” That’s what I used to tell my clients as we went over their Good Faith Estimate (GFE). Big mistake. They had sticker shock, and rightfully so. I was a new loan officer and didn’t think to give my new home buyers a head’s up. So if you’re new to buying a house, expect to have closing costs. They will include, but are not limited to, title company’s fees, appraiser fees, home insurance escrow, property taxes escrow, lender fees and transfer tax fees etc. Although I won’t go over the top things you should know about loan estimates and closing costs today (hint, hint 😉), you should be aware that you will likely bring more than the down payment to closing. The good news is that most of the closing costs can be covered by the seller if they’re motivated and willing.
The biggest obstacles you’re going to face when buying a home are not down payment or closing costs, it’s preparation and education; everything else, we can fix together. So whether your plan is to buy in 2 months or in 1 year, reach out to our team to get started on your plan to buy at Apply w/Marco or email me directly at email@example.com. Our experience is your resource.
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Disclaimer: Marco A. Olivera is a loan officer at Bayshore Mortgage Funding. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views or position of Bayshore Mortgage Funding.