By Ali Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
An ancient Chinese proverb says, “The journey of a thousand miles starts with one step.” Of all the steps that homebuyers will take on their path to the American Dream of homeownership, the first is the most important: gathering up that initial down payment. That is why with summer behind us and some breathing space before the holidays, autumn provides homebuyers a great opportunity to start putting together the money needed to put down in order to secure a mortgage on the home of your dreams.
Start your down payment fund by identifying all of the potential sources available to you such as existing savings and future savings you can acquire by reducing expenses or delaying expensive cash purchases such as new cars or vacations. While you are doing that, inform family members and friends that you'll be shopping for a home and gifts of cash will be a great alternative to giving you conventional holiday gifts. When you have commitments for those gifts, simply ask the donors to sign a gift letter indicating that both parties consider the donation a gift.
A larger downpayment will reduce the principal you owe on a mortgage which will, in turn, reduce your interest rate. So depending on the price of the home and the type of loan you will use, most lenders will generally require a downpayment of somewhere between 5 to 20 percent of the home’s value. If you can put down more than your lender requires, say 25 percent to 40 percent, you may be able to have your lender overlook credit blemishes, lower your mortgage payment or help you afford a more expensive house.
As an example, if a buyer has a yearly income of $40,000, the maximum monthly mortgage payment (about 28 percent of gross income) would be about $933. Assuming that the buyer’s total monthly debt is no more than about a third of his or her income, if the monthly payment of $933 has an interest rate of 7.5 percent on a 30-year fixed-rate mortgage (FRM), that $933 will cover a total principal of $133,435.45. With a 10 percent down payment, that mortgage would cover a house worth $148,262. With a 20-percent down payment, the price would be $166,794. So, a larger downpayment can result in being able to afford a more expensive home or reduce a monthly mortgage payment.
When developing your down payment fund, remember to factor in common additional expenses that are part of the homebuying process, such as home inspection fees to enable you to negotiate any repairs with the seller in the event that there are any structural or mechanical issues that have to be addressed. You will have to budget for appraisal fees which cover the costs of ensuring the value of the property and are generally an upfront fee charged to the borrower by the lender.
Escrow accounts are mandatory for buyers who have a downpayment of less than 20 percent and other types of loans including FHA loans. These ensure that the buyer pays his or her insurance premiums and property taxes. Even after you’ve made the down payment, you will need an additional two to five percent of the home purchase price to cover settlement or “closing” costs.
Once you've calculated what your down payment will be, your next step will be to ensure that you can have the money in-hand at least 60 days before you apply for a mortgage loan. Then, make time to attend a first-time home buying seminar or talk to a credit counselor who does not work for a lender so you can research your options without being influenced by someone who has a financial interest in the home or loan you choose. One of the best resources for this is the U.S. Department of Housing and Urban Development (HUD)’s www.HUD.gov website which offers free housing counseling and seminars.
Shop around for special mortgages and first-time homebuyer programs online. Check with your bank to see if you can use equity in your 401(k) retirement plan. Also, check out opportunities from the United States Veterans Administration at www.va.gov for more information.
For more information on homebuying, remodeling or just enjoying your home, visit our www.biabuild.com website and have a great autumn.