Down Payments

There are a few benefits you will enjoy if you make a large down payment on your next real estate purchase. The most obvious and useful is the lower monthly mortgage payment you will enjoy. This use of a larger than average down payment by itself justifies this action. If you use an online down payment mortgage calculator, you'll see the differences in your projected monthly payment. If you are fortunate enough to not require mortgage down payment assistance, you will see major cash flow benefits.

Another obvious benefit is in your mortgage interest rate. Use a down payment calculator to compute different monthly payments at various mortgage amounts. Then use the mortgage calculator with down payment amounts but also use the lowest interest rate available when inputting the maximum down payment amount you can afford. Then try this with a lower down payment amount but a higher interest rate, which you will probably face if you make a down payment less than 20% of the purchase price. You will immediately notice a significant reduction in your prospective mortgage payment with the larger deposit and lower interest rate. It will be apparent that there are huge benefits, enjoyable on a monthly basis that will come your way if you make a large down payment on your next real estate purchase.

You may be able to purchase a home with a no down payment mortgage. There are some items you should consider if you want or need one of the no down payment home loans available. The first issue to investigate is private mortgage insurance (PMI). Until recent years, almost all mortgage lenders required PMI on any mortgages they granted above 80% loan-to-value (LTV). PMI protects the mortgage lender, in the event of borrower default, for the amount loaned that is above 80% of the value of the property. There are now some no down payment mortgage loans that do not require that you pay for PMI. When you buy a home with no down payment and are not required to pay for PMI, you will probably pay a slightly higher rate to compensate the lender from foregoing that protection.

Whether or not you have to pay for PMI, no down payment home loans will usually be priced from .25% to .50% higher than those mortgages requiring even a low down payment. With home values increasing at a high rate, paying a higher interest rate in order to buy a home with no down payment makes good financial use of your money and leverage. If you’re looking at a zero down payment mortgage, be sure to examine the terms you are offered to be sure there are no items that are potentially detrimental to you. You want to ensure that, except for the lack of a home down payment and a slightly higher interest rate, you are not subject to other restrictive clauses.

A mortgage loan guaranteed by the FHA (Federal Housing Administration) requires a minimum down payment of only 3%. This can be a huge advantage to borrowers with money for a down payment on a house. FHA loans also provide wonderful down payment assistance for first time home buyers, who are often low on down payment money. As additional first time home buyer down payment assistance, FHA allows all of the down payment to be a gift from a family member. Unlike many mortgage programs, that allow gift money but still mandate that at least 3% to 5% of the down payment comes from the borrower’s own funds, this program allows 100% of the money down to be from a gift.

As additional down payment help, FHA loans allow you to include closing costs in your new mortgage amount. This can be another major advantage unavailable with almost all other mortgage programs. The only “cost” involved that is related to this program that provides so much down payment assistance, is the FHA guarantee (insurance) fee of 1.5% of your loan amount and 0.5% per year. With such a low down payment percentage, FHA loans give many people the opportunity to own a home – many people that otherwise would be shut out of the real estate market.

As a first time home buyer, you should first investigate the possibility of getting down payment assistance grants. Many are targeted directly to first time home buyers. Their availability is normally leased on need and gross monthly income. There are a few national incentives that answer the question, "What is a down payment?" to the benefit of first time home buyers.

The American Dream Down Payment Initiative, enacted in 2003, provides funds to all 50 states and some local jurisdictions for down payment funds to increase home ownership. Along with down payment help, these funds can be used for closing costs and property rehabilitation. The Nehemia Program is another lesser known down payment and closing cost gift/grant program. It provides up to 6% of the purchase price to first time home buyers and is available for repeat purchasers also.

Gifts from immediate family members are acceptable to most mortgage programs, and can account for all down payment funds in the FHA (Federal Housing Administration) loan guarantee program. Be aware, that many other mortgage products will still require you to provide around 3% to 5% of the down payment to come from your own funds. Also, it might be lucrative to investigate your state and immediate geographical area for grants, gifts, and other down payment assistance that may be available through local programs. Any of these options will help you become a successful first time home buyer.

There are some effective ways to get help with a down payment for home purchase situations. While the “standard” down payment home loan guidelines remain at 15% to 20%, you can pursue at least three general courses of action which are available.

• Get home down payment assistance in the form of a gift;
• Search for down payment assistance grants; and
• Investigate loan for down payment products.

With most mortgage lenders, gifts must come from immediate family members only. Immediate family is normally defined as mother, father, sister, brother, son, or daughter. Gifts from friends, extended family, and corporations are normally not allowed. Also, most mortgage programs do not allow your entire down payment to be from a gift. For instance, if you’re using an 85% mortgage, often 10% can be a gift, while 5% must come from your own funds. Most lenders still want some cash investment on your part.

Loans are acceptable in some, but not all circumstances. You can investigate down payment loans with very good terms, which are usually necessary because you’ll need to figure the monthly payment into your qualification calculations. You could also consider a “combination” purchase money mortgage loan. There are lenders who offer 80%/20% and 85%/15% loan products that provide 30 year mortgage loans of 80% and 85% of the purchase price. They then give you a second mortgage of 15% to 20% to complete the purchase. Once again, you’ll have to have sufficient gross monthly income to qualify for both loans.

Down payment percentage issues face many prospective home buyers. Using gifts, grants, and or down payment loans can help you complete your real estate purchase transaction to achieve your home ownership goal.

The normal down payment for a house is 20% of the purchase price. Until around 20 years ago, this was pretty much your only choice. Since then, mortgage lenders have become very creative in requiring down payment money. You can now find low down payment mortgages accepting only 3% to 15% down. If you search diligently, you’ll even find a number of lenders offering no down payment mortgages. Be aware you will pay for the privilege of using a lower mortgage down payment in the form of a slightly higher interest rate. When compared to the escalating prices of real estate, however, the trade off in a higher interest rate versus the difficulty of saving for a down payment is normally a fair exchange for you.

If you pursue an FHA (Federal Housing Administration) mortgage, you’ll be pleased to learn that you only need 3% to satisfy FHA down payment requirements. Another choice for a minimum down payment mortgage, in this case all the way to zero, is a VA (Veterans’ Administration) loan. You must qualify for this program by being a veteran of the U.S. military and obtaining an “eligibility certificate” from the Department of Veterans Affairs. Please note that with both of these programs you will pay a guarantee fee (FHA) or a funding fee (VA) which will make your effective interest rate a bit higher than the best market rates. But these are additional alternatives to accumulating the normal 20% down payment required by many programs.

Gifts are allowed as housing down payment assistance. However, be aware that home down payment gift has some documentation and restrictions.

For instance, most mortgage programs require that a mortgage down payment gift comes from an immediate family member (mother, father, sister, brother, son, or daughter). That $20,000 gift that your Aunt Flossy in St. Louis wants to give you should be handled a bit differently than a family down payment gift. Gifts from extended family, friends, or businesses are usually not permitted. Mortgage lenders usually consider “gifts” from these sources as disguised loans for which payments are due, but not disclosed.

Another factor to consider is verification of the source of the mortgage down payment gift. If you have applied for a mortgage loan, the lender often requires proof of the origin of the gift from your family member. A copy of the bank, credit union, or investment account statement showing a balance equal to or greater than the gift amount must usually be produced. Some loan programs also mandate that the gift funds have to be on deposit for a minimum of 90 days prior to your mortgage closing. Once again, this practice is intended to ensure that these funds were not quickly generated by a high cost loan to you or your family member.

Finally, be aware that many loan programs prohibit gifts as mortgage down payment help to equal 100% of your purchase funds due. Most programs require that at least 3% to 5% of the down payment must come from your own funds, which should not be borrowed or gifted money. An important exception to this rule is the FHA loan guarantee program, which allows you to use a gift for your entire down payment. If you want to use a mortgage down payment gift, be sure to analyze all the terms of the loan program you want so you will be in compliance.

You are allowed to use a loan as help with down payment requirements. There are issues and restrictions that you must take into consideration when thinking about using a loan as a down payment assistance program.

First, and most importantly, can you afford the loan you need? Sure, people have used credit card advances, unsecured personal lines of credit, and even loan sharks to generate “off sheet” financing to serve as new home down payment funds, often with, shall we say, unsatisfactory results. Using down payment loans usually works much better. However, you need to disclose these loans and the terms involved. The monthly payment must be included in the calculation of your debt-to-income ratio, the result of which determines your probability of approval.

Second, be sure to verify before you make a formal mortgage application that the loan program you want will permit the use of borrowed funds as your down payment or a portion thereof. There is no point to going through the effort of obtaining a down payment home loan at advantageous terms if your mortgage program prohibits loan proceeds being used as down payment funds.

Using a combination loan (mortgage and purchase money second mortgage) is another option. Issued by your first mortgage lender, this solution is often used successfully by borrowers who need to use loan funds to complete their real estate purchase.