Saturday, August 8, 2015

Why Making a Down Payment on a House Is Necessary

You may have heard all kinds of suggestions on what size of down payment you should make on your house. These range from no money down up to 30%. There are several factors that go into determining what the best down payment is for you. You might also find different types of loans that won't necessarily penalize you for a lower down payment.

A down payment is the amount of money you are willing to pay out when you finalize the home loan contract. It reduces the amount of money being financed, and it can mean you gain a beneficial interest rate.

This is not the same thing as earnest money, the money you put forth in a home offer. The seller will see the earnest money as a sign you are serious about buying their house. Your earnest money can be rolled into your down payment, once you get to that phase.

Your loan to value ratio is based on the amount of the loan left after your down payment. The more you can pay as a down payment, the lower your loan amount is. Your loan to value ratio will also be lower. The value is the value of your home - what you are buying it for. Your bank will give you preferential rates for a loan to value ratio of 80% or less.

A private mortgage insurance, or PMI, might have to be paid for if you put down less than 20%. Since your loan to value ratio is higher, you are seen as more of a risk. Many banks got burned in the housing market crash of 2008, and this is one way of preventing that from happening again.

People with exceptional credit may qualify for a 5% down payment, thanks to their credit history. Banks are more likely to look favorably on them, hence the lower rate.

If you really want to get into a house, and you are willing to pay a PMI, it might be worth a lower down for you. Otherwise, waiting might be the best plan for you so you can reduce your monthly costs. Talk to your lender and evaluate your own financial situation to see what will be best. You will still want to have some money in savings for the unexpected, so don't drain yourself completely.

An FHA or federally backed loan might be able to save you some on your down payment. Many times these loans only require 3.5% as a down payment. If you are a veteran, you may qualify for a no money down VA loan. See your lending institution for more details.

Some states may also have some home loan assistance options. It's worth looking into them, especially if you are willing to live in the country.

Ultimately, the larger a down payment you can make, the better. It will get you a preferential rate and it will reduce the face value of the loan. Banks will be more willing to talk to you and finance your home loan if you can pay a higher down payment.

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