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Your home’s down payment

When looking for a house and thinking about mortgage costs, the down-payment of your home is one of the most important factors to keep in mind.

The size of your down payment can affect the size of the home you are able to afford as well as what your monthly mortgage payments are going to be.

Generally there is one rule of thumb to follow when deciding on mortgage costs and that is the bigger down payment you put down the better off you will be in the long run.

In an article on Bankrate.com called “Down payment,” posted on May 1, 2006, the author lays out the importance of a down payment when buying a home.

Coming up with a down payment can be one of the biggest obstacles in the home buying process for first timers or people with lower annual incomes. But fortunately for those people, there are many lenders who are willing to make other exception in order to finance a “riskier” borrower.

“Most mortgage lenders require a cash down payment of 5 percent, 10 percent or 20 percent of the sale price. Some lenders have zero-down mortgage programs. If you can put down more than your lender requires, say 25 percent to 30 percent, your lender may be willing to overlook past credit blemishes, approve your loan without verifying your income or both. If you come up short on the down payment, less than 20 percent of the buying price, you may have to obtain private mortgage insurance, or PMI, to protect the lender before your loan is approved.”

The perks to putting down more money than is asked of you is that a lot of the times you can get your monthly payments lower, or afford a house that you would not have been able to afford with a smaller down payment.

The author gives a good example of a sample down payment plan.

“Say you make $40,000 a year. Your maximum monthly mortgage payment (28 percent of gross income) would be $933. Assuming your total monthly debt is no more than $1,200 (36 percent of gross income), the bigger the down payment, the more expensive the house you can buy. For instance, say the monthly mortgage payment of $933 has an interest rate of 7.5 percent. In a 30-year fixed-rate mortgage, that monthly payment covers a total principal of $133,435.45. With 10 percent down, that mortgage would cover a house worth $148,262. With 20 percent down, the house price would be $166,794.”

Once you have figured out the amount of down payment you can afford, it is important to take other things into consideration.

It is best to have your monthly budget completely figured out before you put a down payment on a home. If you do not do this, other unexpected costs could come into play and you could risk a default.

The author also lists other tips to help you achieve your dream of buying a home by securing a sturdy down payment. He suggests having your down payment ready 60 days before applying for a mortgage loan. He also suggests borrowing from a loved one or other savings plans.

“Borrow your shortfall from the equity in your 401(k) retirement plan. You will be charged prime rate with possibly a small margin added on, but you'll meet your down payment goal and you can repay your retirement fund through your payroll deduction plan.”

“Borrow from family or relatives and pay them back monthly. Lenders may require you and your family lender to sign a "gift letter" indicating that both parties consider this a gift before they will factor the amount into the loan.”

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