Mortgage & Equity
4 Down Payment
This section will discuss:
Sizing up your financial resources for a down payment.
Options available to you if you don't have a 20 percent down payment.
The biggest hurdle for home buyers, especially first-time buyers, is coming up with enough cash to cover the down payment and other upfront costs. In today's highly competitive mortgage market, 5 and 10 percent, or even lower, down payments are common. What if your savings fall short? Don't give up. Let's look at some ways to come up with the money you need.
What Do You Have?
First, consider all the possible sources of down payment funds available to you, as listed in the accompanying chart. Perhaps there are some you hadn't thought of immediately. For example, if you're a two-car family, could you get along with one car and sell the other? Could you get money from your parents or other family members? If so, you'll need a letter stating that the money is a gift, not a loan.
Your Down Payment Sources:
| Share draft or checking accounts | $ |
| Savings accounts | $ |
| Stocks, bonds, etc. | $ |
| Roth IRA | $ |
| Cash value of life insurance policy | $ |
| Retirement accounts, such as 401(k)* | $ |
| Gifts from family | $ |
| Other | $ |
| Total cash and assets | $ |
* But remember, you need to safeguard money for your retirement, too.
Of course, you shouldn't pour all of that amount into a down payment. You'll also need cash for closing costs, upcoming major home repairs and other things in your life. Be realistic about how much you can pay down, keeping in mind that the more that is, the smaller your mortgage, and therefore your monthly payments, will be.
Where Else to Look
If you're short of where you need to be, you have various options:
- Save more before buying a house. Fill out a monthly budget. Then take a hard look at your expenses. Where can you reroute dollars into savings for a down payment?
- Check into loans backed by government agencies. You may qualify for a loan from the Federal Housing Administration (FHA), which offers loans requiring as little as 3 percent down, or the Department of Veterans Affairs (VA), which offers loans with no or low down payment. The U.S. Department of Agriculture's (USDA) Farm Services Agency offers loans to farmers, and USDA's Rural Development offers loans to people in rural areas. You'll find information on all these programs at www.hud.gov/mortprog.html. Your state, county or city housing agency may also have special programs for moderate-income buyers (see government listings section in your phone book). These agencies also often have different mortgage qualification guidelines than the conventional 28/36 formula discussed in the previous section.
- Buy private mortgage insurance (PMI), which allows you to make a down payment of less than 20 percent. Your credit union lender most likely will add the PMI premium into your monthly payment. In some cases, you may be asked to pay one year's premium up front, which would increase your closing costs. Generally, you can drop PMI once your equity level reaches 20 percent of the value of your home. Your equity level typically rises as you make mortgage payments and as the property appreciates in value. For more information about PMI, talk to your credit union lender.
Note: PMI is insurance for the lender in case you default on the loan. You may also want sufficient insurance to cover mortgage payments if something happens to you, so your family won't lose the house. More on this in the Insurance section.
