Between finding the perfect house to buy, searching for affordable home mortgage rates, deciding on a lender or broker, and making sure the credit scores are in good order, there is the down payment challenge for the potential home-buyer to factor into the financial formula. It is easily one of the most difficult of hurdles for the home-buyer to manage, and even more so for those in the lower range of income bracket, and those contemplating purchasing a home for the very first time. Luckily, many lenders are becoming more flexible in granting approval with smaller down payments.
Generally, lenders require a range between 5, 10, or 20% of the purchase price, with a few 0%-down loan programs available. If a borrower can offer funds in the 25 – 30% range, then lower credit scores can be less of a factor, along with income verification. If a borrower falls below these thresholds, the lender will more than likely request private mortgage insurance, or PMI, to cover the risk. The bottom line strategy is – the more money down, the lower the monthly payment, or, the more ‘house’ a borrower can consider buying.
In simple terms, and following the required 28% monthly payment-to-income ratio, and the 36% debt-to-income ratio, a benchmark monthly mortgage payment of $933 can be used as an example. With an interest rate of 7.5% applied to a 30 year fixed-rate loan, the total principle would be $133,435.45. By offering 10% down on the loan, the mortgage payment would cover a home costing $148,262.00. Offering 20% as a down payment would boost the ‘available’ home purchase price to $166,794.
With this in mind, it is also best if the borrower has the necessary down payment funds secured at least 60 days prior to beginning the application process. In addition, it is wise to forgo or postpone other cash outlays or credit applications, as well as making sure sufficient funds for the closing costs are on hand, and the credit scores have been reviewed and mistakes rectified for the best chances for lender approval.