Tips & Tools : down payment

Top Six Down Payment Mistakes

RE.com Tips & Tools — Tue, 31 Jul 2007 18:33:00 GMT

About to make a down payment on a home? Here's how to avoid the six most common down payment errors.

Deciding how much of a down payment to make on a home is one of the most crucial steps in the mortgage process. The amount you pay up-front is a major factor in determining how much your monthly payments will be, which makes it a decision that could affect you for years to come. Here are six of the most common down payment mistakes home buyers make and advice on how to avoid making them yourself.

Mistake #1: Making too small a down payment
While lenders do offer mortgages with down payments of less than 20 percent of a home’s sale price, these loans require you to pay private mortgage insurance (PMI) -- an additional fee tacked on to your monthly payment to help protect the lender in case you should default on your loan.

In addition, low- and no-down-payment loans frequently carry higher interest rates and so can end up costing you considerably more over the life of your loan. Conversely, a down payment greater than 20 percent may earn you a more favorable interest rate if you have a less-than-stellar credit rating.

Mistake #2: Making too large a down payment
While common sense dictates that the more you pay up front, the better off you’ll be, that’s not always the case. One mistake first-time homebuyers sometimes make is using such a large portion of their savings for their down payment that they end up not having enough left over to cover closing costs and other expenditures for their new home.

Mistake #3: Not making a down payment at all
Some lenders offer mortgages that require no down payment but these loans can be risky. Paying no money down puts you in the position of having no equity in the home (i.e. you don’t own any part of it). Should the value of your home fall, there is the risk that you could end up owing more to the lender than your house is worth. This situation could also make it difficult to refinance your mortgage in the future.

A no-down-payment mortgage may be an effective strategy in certain situations. However, you need to be economically responsible and financially sound to be able to handle the inherent risks involved.

No-down-payment loans often come with a higher interest rate than loans with a conventional down payment. As a result, your monthly payments will be higher, leaving you with less money available for bills and emergencies.

Since you’ll be paying less than 20 percent of the home’s purchase price, you will also have to pay PMI or be required to take out a second loan (known as a “piggyback loan”). Each of these options increases the monthly cost of owning the home.

Mistake #4: Paying with unseasoned funds
In most cases, a down payment is a pretty substantial chunk of money, and not everyone has the ready cash to cover it. A gift from a friend or family member can help, but don’t think that just because you’ve come up with the full amount that you’re necessarily in the clear.

All funds -- whether they’re gifts from relatives, loans against an investment portfolio or your own savings -- that have been in your account for longer than two months are referred to as “seasoned,” meaning that they’re considered your money. If your bank statements indicate a large cash deposit that’s less than two months old, your lender will need to know where those funds came from and whether they’re gifts or loans. Gift-givers may be required to provide a letter to the lender indicating that they are in a financial position to offer the gift. Also, generally speaking, the larger your overall down payment amount, the less concerned the lender will be about where the money is coming from.

The lender wants assurances that the money you’re putting towards your down payment is actually “yours,” since it’s assumed that if you’re investing a significant portion of your own money into the down payment, you’re less likely to default on your loan.

Mistake #5: Neglecting to bring a cashier’s check to closing
Along with figuring out how much of a down payment you should make, you also need to ask your closing agent exactly how much you will be required to pay at closing. It’s not enough to simply bring your personal checkbook to closing. You will a cashier’s check to pay the amount of your down payment and your closing costs. Find out ahead of time exactly what the final total will be and obtain a cashier’s check for that amount.

Mistake #6: Incorrectly assessing your debt comfort level
No one knows better than you how much debt you can handle. Trust your instincts; if you’d rather pay as much as you can at the start and have the benefit of lower monthly payments, don’t let anyone dissuade you from that. The worst thing you can do is lock yourself into a mortgage that ends up costing you more per month than you can comfortably afford to spend.

Why Zero Down Payment Loans Can Be Risky

RE.com Tips & Tools — Sun, 17 Jun 2007 23:36:00 GMT

A down payment can help to reduce the risks of homeownership.

Mortgages that don't require a down payment help many people purchase a home they otherwise wouldn't be able to afford. That's very good news. But no-down payment mortgages have additional risks that borrowers should understand before they obtain such financing.

What is a down payment?
A down payment is simply a percentage of the home's purchase price. For example, a 10-percent downpayment on a $250,000 home would be $25,000. A down payment also can be expressed as a "loan-to-value ratio" or LTV. A 10-percent down payment would be equivalent to a "90-percent LTV."

The buyer's down payment becomes the new homeowner's initial "equity" in the home. (Equity is the value of the home minus what's owed on the mortgage.) For example, if you borrowed $180,000 to buy a $200,000 home, you would have $20,000 of equity. If you borrowed $200,000 to buy that same home, you would start out with zero equity in the home.

Zero money down can increase your loan costs
No-down payment mortgages are riskier for the lender since the borrower doesn't have any ownership stake in the home and could become "upside-down" if the value of the property dipped below the purchase price. That's why high-LTV loans typically are more costly than loans that require a larger down payment.

A down payment that's less than 20 percent of the home's purchase price triggers the need for either a second loan, called a "piggyback," or mortgage insurance, which protects the lender if the borrower defaults. Either option adds to the borrower's costs of owning the home.

Why having no equity can be risky
Homeowners who don’t have equity can't borrow against their home to remodel, add on or make repairs to the home or for such personal reasons as a family emergency, medical expenses or college tuition. Refinancing may be difficult as well.

Lack of equity can be a bigger problem if the homeowner needs to sell the home because if the value of the home has dipped, the sale price might not be enough to pay off the mortgage. If the value of the home stayed the same, a seller with no equity would have to pay the transaction costs out of his or her pocket. That's why soft housing markets make no-down payment loans more risky for lenders and borrowers.

Qualifying for a Home Loan

RE.com Tips & Tools — Thu, 15 Feb 2007 19:41:00 GMT

When considering your mortgage, lenders look at a variety of factors, including your ability and willingness to repay the loan.

Your ability to repay is verified by your current employment and total income. Your willingness to repay is closely related to how you’ve fulfilled previous financial commitments. This is why lenders place such an emphasis on your credit report.

It is important to remember that there are no rules carved in stone. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one.

Low Down Payment Mortgages

Even if you do not have a lot of money to use as a down payment, you still may be able to purchase a home. More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with as little as 5 percent down. With these loans, however, you may be required to carry Private Mortgage Insurance (PMI).

TIP: For more information on how you can take advantage of the benefits of a low down payment home loan with mortgage insurance, contact your lender or real estate agent.

This information is adapted from "A Consumer’s Guide to Mortgage Lock-Ins" published by the Federal Reserve Board and the Office of Thrift Supervision.

How much to put down on a home

RE.com Tips & Tools — Tue, 16 Jan 2007 20:25:00 GMT

Unsure about how much you need to save in order to make a down payment on a home? There are several options.

It’s not always easy to save up enough to make the traditional 20 percent down payment on a home. Fortunately, lenders today offer many low-down-payment mortgages. But when deciding how much to put down, you should consider the following:

Is 20 percent the standard down payment?

In order to qualify for a conventional mortgage, lenders usually require a minimum down payment of 20 percent. If you put down less than 20 percent, most lenders will require you buy Private Mortgage Insurance (PMI). This insurance typically costs about one-half of 1 percent of the purchase price of the home and protects the lender in the event that you should default on the loan. Your overall mortgage costs will therefore be less if you come up with 20 percent down and can avoid having to pay PMI.

What if I put down less than 20 percent?

If you can’t afford a 20 percent down payment, paying PMI may be your best option. And once you reach 22 percent equity in your home (or sometimes 20 percent equity with a good payment history), you can get your lender to cancel the insurance. An alternative is to apply for an 80/10/10 loan. It enables you to avoid PMI by financing half of the required 20 percent down payment with a second mortgage. The way it works is that 80 percent of the purchase price of a home is financed through a first mortgage, 10 percent through a second mortgage, with the final 10 percent coming from the down payment. Or you can apply for a government-insured FHA loan. Again, you will have to pay for insurance, but you may qualify with a down payment as little as 3 percent.

What about putting down no money at all?

It is possible to finance 100 percent of the purchase price of a home with a mortgage that requires no down payment at all. The disadvantage of this type of financing is that you are likely to be charged a higher interest rate than that of a standard mortgage. This means your monthly mortgage payment will be higher. Also, because you didn’t make the standard 20 percent down payment, you will have to pay PMI.

Let’s review the options

When deciding how much to put down on a home, it’s important to know what your options are so you can decide what works best for you.

Would you prefer getting instant equity in your home and lowering your monthly mortgage payment? Then putting down 20 percent may be best for you.

Are you unable to come up with a 20 percent down payment but want to avoid paying PMI? Then you may want to consider an 80/10/10.

Can you only come up with a 3 percent or 5 percent down payment and don’t want to wait to buy a home because you are concerned about rising house prices? Maybe a government-insured FHA loan would be a good answer.

Do you have no savings at all but are so eager to enter the real estate market immediately that you are willing to pay the extra costs involved in a no-money-down mortgage? Provided you are able to handle the required payments and are confident your financial situation will enable you to refinance for a mortgage with better terms in the future, it could be the way to go.

The important this is to evaluate your own situation carefully before you decide how much to put down on a home.

What to think about when you're buying a home

RE.com Tips & Tools — Fri, 12 Jan 2007 20:26:00 GMT

Answer these questions and be sure you're making sound financial decisions.

Buying a home is a serious financial undertaking and it is important that you know what you’re getting yourself into. Ask yourself some important questions so that you can make the smartest financial move.

How much can I afford?

There is not a set formula for how much you should spend on a home. Many experts indicate that you shouldn’t spend more than two and half times your total yearly income. Others suggest that no more than thirty-five percent of your total monthly income be spent on your living expenses, including utilities. Talk to your lender and devise a reasonable monthly budget so that you can determine for yourself how much you can truly afford to spend.

How large should my down payment be?

First, you will need to find out the minimum down payment required by your lender. If your lender does not require a 20 percent down payment you will probably be required to pay private mortgage insurance (PMI) if you put less than 20 percent down. There are some options you can look into, such as a piggyback loan (also known as an 80-10-10 loan), that can be used to avoid paying PMI even if you don’t have a large down payment. Also keep in mind that the larger your down payment is, the lower your monthly payment will be. Think about your savings, your budget, your lender’s requirements and your loan options when making a decision about your down payment.

What kind of mortgage should I get?

It is important that you educate yourself on the different kinds of mortgage products before you buy a home. Different products have different terms, requirements, and interest rates. For instance, a fixed-rate mortgage keeps a constant interest rate for the life of the loan, while an adjustable-rate mortgage (ARM), has an interest rate that changes periodically according to general interest rates. When it comes to buying a home, do your research and make sure you’re getting the best mortgage you can.

Checklist: Contract Terms and Clauses

RE.com Tips & Tools — Thu, 11 Jan 2007 21:33:00 GMT

We all know far to well that the idea of combing through a contract may be unappealing, there are numerous key points all of us should be familiar with and understand.

When a purchase contract is set before us, many of us may find our eyes glazing over. While the prospect of combing through a contract may be unappealing, there are key points everyone should be sure to understand. Here are some common terms and clauses in a purchase contract. Clarify with your REALTOR® if there is anything you don’t understand.

Name of buyer(s) and seller(s). It seems obvious, doesn’t it? If you are the buyer, make sure to fill in your name as you would like it to appear on the deed. If there is more than one buyer, list the names of all co-buyers.
Legal description of the property. Make sure the description is specific, particularly regarding city limits, school districts and rural properties, and includes any relevant zoning information, as well.
Down payment or deposit information. Often, a buyer will offer a deposit (usually $1,000 or one percent of the purchase price) with an offer. This amount should be held in escrow (by an attorney or a REALTOR®’s trust account) until all conditions of the contract have been met.
Purchase price. Both parties will negotiate the amount until an agreement is reached. The contract should list the final agreed-upon price, as well as the exact terms of sale.
Closing date. This is the date the deed will change hands. If you are the buyer, it is the date the home will officially become yours. If you are the seller, you will need to move out by this date.
Personal property included in the sale. This includes any appliances, furniture or other items included in the contract. Include a detailed description of all personal property items, including the make and model of any appliances.
Disclosure of defects and lead paint disclosure. Some states, such as California and Maine, require the seller to disclose any known defects about the property in writing. If the house was built before 1978, the seller is required to include a lead-based paint disclosure as part of the contract. If the property was built after 1978, this disclosure becomes optional.
Contingencies. If the sale is dependent on the buyer’s mortgage financing, the details of the financing should be included in the contract. The buyer can even list things such as expected interest rate and mortgage terms.
Inspections. An acceptable property inspection should be a condition of sale. If there are other, specialized inspections to be conducted (such as a termite inspection), they should be listed here as well. Include a clause that indicates who takes on the cost of repairing problems found during the inspection process -- the seller usually assumes the cost of major repairs.
Home warranties. If a home warranty has been purchased, information should be included in the contract.
Title insurance. Information about title insurance should be listed in the contract. There should also be a clause identifying how to handle potential problems that arise during the title search.
Commission information. The contract should stipulate who pays the agent’s commission and how much gets paid.
General contingency clauses. Some contracts include a general clause that allows the buyer a few days to review the agreement with an attorney or other professional.
Signature. This is the famous dotted line. Both the buyer and seller should sign only when they are comfortable with all terms in the contract.

How to Work with a Contractor

RE.com Tips & Tools — Thu, 11 Jan 2007 20:35:00 GMT

Follow our tips to ensure that your home improvement project comes in on time and on budget. Follow our tips to ensure that your home improvement project comes in on time and on budget.

Starting a home renovation project is exciting. But working with building contractors can mean big headaches: a two-week delay between removing your old bathtub and installing a new one; a kitchen island that ends up costing more than expected; or, worst of all, the contractor who disappears with your down payment and your dream.

Fortunately, there are ways to protect yourself from delays, cost overruns and outright fraud. Follow these tips for hiring and working with a contractor.

Where to look

You can get matched with a prescreened contractor in your area through companies such as ServiceMagic. You submit a request online that includes details of the project or work you need done. ServiceMagic gets back to you with three or four service professionals, as well as ratings and reviews from customers, and you pick the contractor you want to work with.
You can also ask friends or family members. Ask around, especially if you know someone who recently had a similar project done and is happy with the result.
If you can’t get a referral, look for a contractor who is a member of a local builders’ association or similar industry group. Using the phone book as a source isn’t a good idea because some states only license electricians and plumbers, so anyone with a van and a toolbox could call himself or herself a builder.
Get references and take the time to follow up on them. Ask the contractor’s previous clients whether their jobs were completed on time, if there were any surprises, and if they would use the contractor again.
When you ask for quotes, be explicit about what you want done. The more specific you are, the more likely you are to get reliable quotes.

How to choose

Get quotes from at least three contractors. It’s standard, and the competition will prevent contractors from giving you an estimate based on what they think you’re able to pay.
Don’t automatically pick the lowest quote. Sometimes a low-ball offer indicates inexperience, and that can lead to cost overruns later on.
Carefully compare the quotes, especially the description of materials. Be on the lookout for terms like "or equivalent." You should have the right to approve any substitutions if a material specified in the quote is not available.
Be prepared to wait a few weeks or even months for the right person. It’s tempting to take the guy who can start right away, but good contractors are often busy.
Pick someone with whom you have a good rapport. Remember, this contractor and his or her crew will be coming into your home -- maybe for weeks -- so you’re going to have to get along.

Get it all in writing

Always draw up a contract before the work begins, and include a start date and estimated completion date. Often you can include a clause that gives you a discount if the work isn’t done on time.
Make sure your contract specifies that any additional charges or expenditures must be authorized by you in advance. Cost overruns happen, but you should not be surprised when you’re presented with the bill.
Ask if the contractor is fully insured, and ask to see the papers. Otherwise, you could be on the hook if one of the workers is injured on the job or if the crew damages your property.
Specify that the contractor is responsible for getting the necessary permits for the work.
Obtain a written guarantee of the workmanship and materials.
Agree on who’s responsible for clean-up and garbage removal.

Paying the piper

Your down payment is only an assurance to the contractor that you won’t hand the job to someone else before the start date, so it needn’t be larger than 10 percent of the total cost of the job, up to a maximum of $1,000. Some states limit the amount the contractor can ask for up front, so know your rights.
Stagger the remaining payments and tie them to specific stages of the project, so you can hold back if the work is progressing slowly. Outline this payment schedule in the contract.
Don’t pay cash. While sometimes paying cash can get you a discount, you should never do business with someone who insists on only cash payments. It’s recommended to pay by check and get a receipt.

As your project moves along, ask for regular progress reports and keep a good line of communication open with the contractor. If you don’t know one end of a hammer from the other, you might consider hiring a home inspector to keep an eye on things.

Pulling Together a Down Payment

RE.com Tips & Tools — Thu, 11 Jan 2007 19:37:00 GMT

When you venture into the housing market for the first time, you want to buy the best home you can afford

However, coming up with the usual 15 to 20 percent of your purchase price up front can be challenging.

Here are a few tips on pulling together your down payment:

1. Bank your extra money. Any time you get a tax refund, bonus, commission or birthday check, put it into a separate savings account that you never touch.

2. Live on one income. If you are in a couple, try living on one partner’s income while saving the other’s.

3. Get rid of your second car. Or your cell phone. Or your cable service. Pare down your lifestyle so that you can add to your savings each month.

4. Get a roommate. Change your lifestyle from solo to shared living. This will reduce your rent and allow you to save more.

5. Pay off your debt. Get rid of debts with high interest rates, such as outstanding credit-card balances. This will ease the strain on your wallet and improve your credit rating. When your debts are paid off, try to save the money that would have gone to payments every month.

6. Take a second (piggyback) mortgage. If you can’t get five percent or more together for your down payment, you may be able to get a piggyback loan to cover what your first mortgage doesn’t.

7. Ask your lender about Fannie Mae or Freddie Mac products. Both of these Congress-chartered companies have flexible, low down-payment products that allow you to buy a home with down payments of zero to three percent.

8. Ask your family. Parents or grandparents can be a great resource. They may be able to lend you money at a low interest rate.

9. Find out about loan assistance programs. Government organizations like Veteran Affairs and the Federal Housing Administration offer programs that help people who don’t have large down payments obtain mortgage financing. Also, check with your state and local housing authorities to find out what they can offer.

Five Rules for Smart Home Buying

RE.com Tips & Tools — Thu, 11 Jan 2007 17:07:00 GMT

1. Arrange financing before you make an offer. Increase your chances of buying the home you want by getting pre-approved for a mortgage and waiving financing as a condition on your offer to purchase. In a competitive market, sellers have been known to ignore an offer that is conditional on obtaining financing. Some will even accept another offer for less money if there is a firm commitment behind it.

2. Know your limit. No matter how much you love a home, decide on the maximum amount you are willing to spend and stick with it. Write the number down as a reminder. If you act on emotion or find yourself in a bidding war, it’s easy to forget your limit and wind up paying a lot more than you bargained for.

3. Hire a home inspector. A home that has basic curb appeal and a stylish interior may also have a neglected roof, broken furnace or other hidden flaws in need of repair. Know what you’re getting before you buy. Make your offer to purchase conditional on a home inspection. Get the seller to cover the cost of any necessary repairs or deduct the estimated cost involved from your final offer. If the seller is unwilling to accept these terms and you still want to proceed with the sale, be sure to factor in repair costs on top of your mortgage.

4. Budget beyond the down payment. There’s more to affording a home than coming up with a down payment and negotiating a mortgage rate. Remember to budget in extra money to cover your moving and closing costs (which can often add up to between two and six percent of your loan). Ask your lender or mortgage broker to give you a Good Faith Estimate of the loan-related fees you’ll have to pay. Your REALTOR® can also help you compile a list of other expenses.

5. Get a move on moving. Try to synchronize moving/closing dates so you can move from your existing home to your new home on the same day. Otherwise you may have to arrange a short-term rental or camp out with family or friends and put your furniture in storage. You don’t want to have to move twice.