Buying a home is a very exciting time, but it can also be a stressful time and a little bit of a financial strain. For people who are saving up to buy a home or a vacation home, one of the biggest questions they have is how much of a down payment they should be prepared to offer. Putting a larger amount down can help reduce the amount of the mortgage every month, but putting a smaller amount down can help a homeowner have more in savings. Both are good choices, and both can help any homeowner feel better about their finances and sleep better at night. Here's what a home buyer should be considering.
How Much of a Down Payment is Needed?
There are options for the amount of the down payment that a homeowner chooses. The best case scenario is to put down 20 percent or more, so that there's no need to pay for extra types of insurance to protect the lender. Putting 20 percent down also helps a new homeowner have some equity in their home right away, so they aren't "upside down" in the home they just purchased. But putting that much down isn't strictly necessary. It's also possible to put five percent or 10 percent down, but there may be other fees and expenses associated with those lower down payment amounts.
Can the Down Payment Be a Gift?
The down payment that a buyer is using for their new Panorama Hills house can be a gift from a family member or other person close to them. They'll generally need a letter or a form stating that, and there may be specific language or wording that has to be used, along with specific details or information that has to be included. With that in mind, it's very important to be honest about whether the down payment is truly a gift. If it's supposed to be paid back it's not a gift, and it needs to be considered a loan. That can affect the debt to income ratio of the buyer, and may be a problem.
Taking Out a Loan for a Down Payment
Technically, there's no real reason that a buyer can't get a loan for the down payment money, as long as that doesn't affect their debt to income ratio to the point that they can't get the loan anymore. There are actually some loan products that allow this. However, often a buyer gets an approval for a home loan, and then before closing they buy new furniture for their new home on credit or they purchase a new car. That changes the debt to income ratio for the home loan. These actions may raise the debt to income ratio beyond what is allowed and might prevent them from completing the closing of their home. They can actually lose the home they were about to buy because of this, so they want to be very careful if they're considering getting a loan to use for their down payment.
Is LMI Required?
Most buyers try to put 20 percent of the purchase price down on the home, so they don't have to pay Lenders Mortgage Insurance, or LMI. For those who put down less than 20 percent, mortgage insurance is generally needed. The lender doesn't have to require it, but most lenders will. That's because they want to protect their investment in the home, and if they have to loan the buyer more than 80 percent of the home's value they see that there can be a bigger risk of the buyer defaulting on the mortgage. To reduce their risk, they ask for additional insurance. Buyers that want to avoid that extra expense will need to put 20 percent down.