House Shopping: Devise a Down-Payment Plan
If you're thinking about buying a house in the next year or two, you may wonder what you're getting into. Pervasive news reports about the "mortgage meltdown" are shaking home buyers' confidence. Confusion and questions abound, especially for first-time buyers.
One question on your mind may be about the down payment. How big a down payment do you need in today's lending environment? Once you have a dollar figure to aim toward, a second question surfaces: Where are you going to get the money?
American consumers are more concerned about having enough money for a down payment and closing costs than they have been in five years of polling, according to the 2007 National Housing Pulse Survey, conducted in October 2007 by the National Association of Realtors® (NAR), Chicago. More than 80% of survey respondents said down payments and closing costs are obstacles for home buyers in their area.
How much do you need for a down payment?
In 2006, 45% of first-time home buyers made no down payment when buying a house, according to NAR. Some of those zero-down-payment options, however, were attached to questionable mortgages that eventually got buyers into serious financial trouble—the subprime mortgages much in the news these past months. Those types of mortgages are history in the marketplace, although many homeowners remain mired in them.
You still may find some zero-down-payment mortgages available from quality lenders. Just expect to pay a premium in the form of a higher rate on the loan and/or higher fees, says Tracy Ashfield, executive vice president of Strategic Mortgage Solutions, Madison, Wis., a mortgage consultant to credit unions nationwide.
With lots of ingenuity—and perhaps a little sacrifice—you can build a down-payment fund.
"That's why we stress so much to folks that it's important to accumulate some down payment," she says. "You'll get a more competitive mortgage product that will help you keep your monthly payments down." That will save you a lot of money in interest over the life of your loan.
Ashfield's No. 1 piece of advice to prospective home buyers these days is "to get good counsel. That's more important than ever." That counsel should come from someone who has a firm grasp of the overall mortgage scene and your financial needs—such as your credit union lender. "Sit down with your lender as soon as you possibly can," Ashfield advises, "even if you're a year or 18 months away from buying."
With your lender, you can go over your income, savings, other assets, and credit score. From there, you can figure out a reasonable down-payment goal.
"Maybe you've accumulated a 5% down payment," Ashfield notes. "Or maybe it makes more sense to pay 3% down and use some of your money to pay discount points to buy down your rate a little bit." (Discount points are fees you pay a lender at closing to reduce your interest rate. A point is 1% of the amount borrowed.)
Your best strategy depends on your complete financial picture. Your lender can help you select a down payment and other mortgage features that best fit your financial situation. (Note: If your down payment is less than 20%, you'll generally pay for private mortgage insurance, which protects the lender against losses. That adds to your monthly mortgage payment.)
Sit down with your lender early, even if you're a year or 18 months away from buying.
"This is a time for buyers to be tuned in," Ashfield says. "Plan ahead, watch the market, and get good counsel. Don't fold up your tent and say, 'Oh, mortgage rates have gone up. It's all too confusing. I shouldn't buy a home.' Don't miss out on what may be a perfect opportunity."
Where will you get your down payment?
At first glance, saving for a down payment may seem insurmountable. But with lots of ingenuity—and perhaps a little sacrifice—you can build a down-payment fund. Here are some ways to do it: