Down Payment Basics for Home Buying

Coming up with the down payment to purchase a new home can be a challenge. Where do you get the money and how much do you need?
The magic number for most banks is 20%. There are some benefits to the buyers that have that much for a down payment. They don’t have to purchase P.M.I. or private mortgage insurance.

P.M.I. is something most banks require on mortgage loans with less than a 20% down payment to insure the repayment of the loan. The premiums for P.M.I. can cost anywhere from .17% to .92% of the loan amount. P.M.I. can be removed from the loan once the principal has been paid down to under 80% of the appraised value of the home. Usually a new appraisal will have to been conducted.

Another advantage for having 20% down is that you can get a better interest rate or lower points on your loan.

In most cases the least you can have for a down payment is 5%, but there are government programs out there that offer grants for first time home buyers. These programs will allow you to purchase a home with no money down. Down Payment Solutions has a very helpful website to assist you in getting a grant for your down payment so does the HUD website.
If you don’t qualify for a grant for your down payment where do you get the money?

Depending on the amount you need you may be able to use your tax refund for the down payment. Or you might need to save your tax refunds for a couple years to get enough money.

Budget your money each month and put a certain amount into an interest bearing account until you have enough money for your down payment. You would be surprised at how little you can add each week and still have enough for a down payment in a year or two.

For a $100,000.00 house you would need a $5000.00 down payment.
Putting just $50.00 a week into a saving account for two years will get you more than enough money for your down payment.

$50.00 x 52 (weeks in a year) = $2600.00 x 2 years = $5200.00.
For a family of 4 that can easily be cut out of your weekly budget by just not going out to eat one time.

If there is a house you just have to have now and you don’t have the down payment you can try asking a relative for a loan. You can also apply for a signature loan to come up with the down payment as long as it doesn’t make your debt to income ratio too high.

Generally your debt to income ratio should be under 41% of your gross income for all mortgage and recurring monthly expense.

Another option would be to sell stuff. If you have some treasures that you have been holding onto, a motor cycle that you never drive, a snowmobile that hasn’t seen show in years. What better way to get the money for your down payment then to sell your stuff to someone else? If you only have small things to sell try having a garage sale or putting them on ebay.

You could get a part time job. It would only take a few hours a week to save enough money for your down payment. I already showed you how just saving $50.00 a week could get you the down payment for a $100,00.00 house in two years. Add that to the income from a part time job of say $75.00 a week you would have enough money for your down payment in 40 weeks (10 months)
$50.00 savings + $75.00 from part time job x 40 weeks = $5000.00 your down payment

There is always the option of tapping into your IRA or (401)K, but that should be used as a last resort. The tax penalties and long term effect on your retirement income are something to seriously look at before making any withdraws from your retirement accounts. If you have no other avenue with which to get your down payment, then you should repay the money as soon as possible.
These are just some of the basics you will need to know about down payments when buying a home. Always talk to your loan officer to make sure you are taking the right path for your financial future.