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Assembling the Down Payment
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Assembling funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. This includes rounding up financial records, examining your spending habits, and setting a budget you can live with. Remember, too, that the down payment is not the only up-front expense. Allowances for closing costs and closing adjustments should also be included in your budget.
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| SAMPLE: Price: $659,900, Norwalk, 2,864 sq ft, 8 rm, 4 br, 3 bth on 0.29 ac. |
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How much is expected?
The down payment is usually expressed as a percentage of the overall purchase price of the home, and varies depending on the lender, the type of financing and amount of money being borrowed. While the ideal down payment is usually 20%, many lenders have been willing to offer financing with as little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the Federal Housing Administration (FHA), also require minimal down payments.
Private mortgage insurance
Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry PMI, or private mortgage insurance. This insurance protects the lender somewhat in case of loan default, and involves an up-front payment at closing, as well as a monthly premium. However, once your equity has grown to at least 20% of the property value (as verified by another appraisal), you can request the policy be canceled. There is some history of lender reluctance to allow the cancellation of the private mortgage insurance.
Your experienced buyer broker knows how to avoid private mortgage insurance by engineering your financing so as to avoid a first mortgage greater than 80%, while still allowing less than a 20% down payment.
Gift moneys
If you are having trouble saving enough money, many lenders will allow you to use gift funds for the down payment, as well as for related closing costs. The gifts may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating that the gift doesn't have to be repaid.
Otherwise, the lender might treat the gift as a loan that has to be repaid, even if the giver doesn’t require repayment. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. So, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts.
A binder deposit
Buyers are usually expected to submit an earnest money deposit with their offer, typically 1% of the offer. If the offer is accepted, the earnest money is then credited towards the down payment. Be prepared from the outset to have funds earmarked for this purpose. Your buyer broker will place these funds in an excrow account until your attorney authorizes their release to the seller's attorney's escrow.
Don't forget closing costs
In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, documentary stamps, loan origination fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs.
Some buyers are surprised by the amount of the closing costs, which can easily run into the thousands of dollars. Remember, though, that closing costs often can be negotiated with the seller. For example, you may agree to pay the full asking price in exchange for the seller’s paying some or all of the allowable closing costs.
And then there are closing adjustments
Examples of typical closing adjustments include your reimbursing the seller for the fuel oil in the tank, reimbursing the seller for property taxes already paid to the town for the time from the closing date to the end of the current tax cycle, advancing property taxes and mortgage interest to the lender. If you’re buying a condominium unit, you may be required by the association to put up one or more month’s common charges for their reserve fund. These will all be explained by your buyer broker and again by your attorney.
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