San Francisco Chronicle - (Sunday)
How to prepare to make a down payment on a house
One of the biggest hurdles in buying a home is coming up with a down payment—the large chunk of cash that’s typically required to secure a mortgage for a house.
Fortunately, most lenders today offer a wide range of down payment options for 5%, 10%, 15%, or 20% of the price of the house. For many firsttime home buyers, a governmentbacked FHA loan can be obtained for as little as 3.5% down. If you are a military member or veteran, there are even more budgetfriendly options available to you.
If you have your eye on a home and want to see what a mortgage will look like based on different down payments, you can crunch your numbers with an online mortgage calculator or a home affordability calculator. And if you have the down payment you need, you can go straight to applying for mortgage preapproval.
However, if you need to come up with a bit more cash, setting up a savings plan now will help you get the down payment you need. Here’s what you need to know when it comes to making a down payment.
Why big down payments are better
Sound financial planning can help you amass a large down payment. Here’s why that’s usually a good idea:
Smaller monthly payments: Homeowners with small down payments will find themselves with larger monthly mortgage payments.
Less risk for the lender: While low downpayment loans are available, lenders prefer to write loans with larger down payments. So you’ll have a larger choice of lenders to choose from.
Competitive interest rates: A bigger down payment increases your chances of getting a loan with a lower mortgage interest rate.
No mortgage insurance: If you choose a loan that requires less than a 20% down payment, your lender may require you to pay private mortgage insurance (PMI). The PMI is usually tacked on to your monthly payment until you’ve built 20% equity.
Down payment strategies
Many home buyers tap their savings to procure the
funds for a down payment, and often postpone large outlays in order to save money. But here are some other ways to come up with a chunk of money.
Gifts from family or friends: Some types of loans allow “gift” funds — money that is given to you — for a down payment. The person who gives the money must have no financial interest in the property and the funds must be a true gift, backed up by a letter. Banks won’t allow “gift” funds if the gift is actually a loan that has to be repaid.
Down payment assistance: Many local and state government programs offer down payment assistance for borrowers in need, so check with your lender or state housing commission for more information.
NoPMI home loans: There are a few loan options that allow you to put down less than 20% without the added PMI cost. Check with your lender to see if it offers a lowdownpayment, noPMI product if a 20% down payment seems too challenging
Make saving a habit
The surefire way to make your down payment is to start a fund for it now. Sure, saving for a down payment is tough, and building up a nest egg one paycheck at a time can be frustrating. To help you get you to a down payment faster, here are some strategies you can use to make saving money a habit—not a chore.
Review your budget. If you don’t know where your money’s going, you won’t know where you can cut back.
Curb nonessential spending. Once you know where your hardearned pennies are going, ask yourself if you really need that Starbucks, namebrand item, or subscriptions to every streaming service. Trim the fat from your budget — and the savings could be substantial.
Direct deposit: Set up a payroll deposit into your savings account or an automatic checkingtosavings transfer on payday, to make savings a nobrainer
Lowrisk investments: Consider certificates of deposit, money market funds, and other low to norisk savings or investment vehicles to help your savings accumulate interest.
Nix credit cards: Reduce your credit card debt by only using a card for emergencies.
Adjust your tax withholding: It may feel good to get a tax refund in the spring, but that’s essentially a free loan to the government. The money you get back is cash that could have been earning interest for a year. The IRS website has a calculator to learn how much in taxes you should have withheld from your income.