Easing Your Home-Buying Anxiety: The Down Low on Down Payments

You’ve done a little online searching and found a few homes that you’re interested in. Think you’re ready to buy a new home? Wouldn’t it be great if it were that easy? If you’re seriously ready to enter the home-buying market, you’ve probably considered many other factors that likely include interest rates, mortgage lenders and a down payment.

Wait. You have thought about a down payment, right?

For anyone who is entering the home-buying market, the down payment or percentage of a home’s price that is paid up front, can be a daunting number and a major source of anxiety. But, you may be surprised to know that what you perceive about a down payment and what is actually true are two different things.

To a lender, the down payment is your investment in the home. It affects the amount that you’ll ask them to lend you; so, in turn, it also may affect the type of mortgage you qualify for, your interest rate and private mortgage insurance, not-so-lovingly known to many buyers as PMI.

Many conventional loans require buyers to make a down payment of 20% of a home’s value. True… and false. If a buyer is able put 20% of a home’s price down, they likely won’t have to pay private mortgage insurance (PMI) on a conventional loan. A buyer who is able to put down 5-10% percent of a home’s price may still qualify for a conventional loan, but they may have to pay monthly PMI to decrease the lender’s potential risk of loss.

What does that mean for a buyer? Yes, they may qualify for the conventional loan, but their monthly payments will be higher until that PMI is paid off or their loan-to-value ratio reaches 80% - also known as 20% of the home’s selling price or bank-appraised value at the time of sale.

How does the interest rate come into play? If a buyer puts 20% down, the lender may offer a lower interest rate, because their risk is less. So, forking over a little extra money up front may pay off big time over the life of the loan.

With so many factors affected by a down payment, it may seem like the anxiety just builds. One way to ease that anxiety is to talk with a lender or lenders. Find out what their requirements are for down payments on the conventional loans they offer; and, do it before you start searching for homes that may be out of your approved price range. Buyers are likely to feel more confident with a preapproval letter in hand and sellers certainly appreciate entertaining an offer from a buyer who they know means business.

Whether you intend to make a down payment of 5, 10, 20% or more, coming up with that much cash before closing can feel overwhelming. Here are a few tips to help you save if you find yourself falling short of your lender’s required down payment:

1. Find out about any state or local programs that might offer incentives or grants for buyers. An experienced real estate agent or lender should be able to give you information on these available programs.

2. Hold a garage sale. This option could be drastic or not so drastic. You could sell your car, boat or motorcycle and make some quick cash fast, although it might hurt a bit. You could also sell all of those clothes you don’t wear or the other household items you don’t use, which may not hurt at all!

3. If you’ve got the time, pick up a part-time job and devote your earnings to your down payment. You may not even have to leave home to make the extra money. Look at your professional capabilities and see if freelancing may help you raise your down payment funds.

4. Look to friends and family members who may be able to help you save. Some lenders will allow buyers to apply “gifts” toward their down payment amount. If they are allowed, lenders usually require the giftor to provide a letter that says the money does not need to be repaid.

5. Get to know your spending habits. Once you know where you’re spending your money, you may find it a lot easier to save. You should also keep track of your saving habits. As frightening as it may be to see where you’re shelling out your money, seeing that dollar amount in your savings account climb may give you more incentive to keep on saving.

The bottom line with putting a down payment on a new home is that every lender is different. Before you even begin to feel any anxiety about saving for a down payment, meet directly with a lender to find out what their specific requirements are and what you might need or want to save.

If you need more information about making a down payment on a new home, please contact a mortgage specialist at Pennsylvania Preferred Mortgage.