Many people go into a home loan without a down payment. Programs like USDA and VA loans don’t require a down payment and a FHA loan only requires a .5% down payment, but it must be your own money (not a gift). Even with those programs to help, there are still some very good reasons for trying to get a down payment.
I know a lot of people think that since they don’t have the money in their bank account, they’ll just have to go into a home loan without a down payment, but that’s not the case. After these 6 points I’ll give you some ideas you may not have thought of for coming up with the cash.
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6 Reasons To Consider A Down Payment
1) You’ll get a better interest rate than if you had no down payment.
2) You will pay less on your monthly mortgage payments if you have a down payment.
3) If you put 20% or more down on the home you’re buying then you won’t have to pay mortgage insurance.
4) A down payment makes for a stronger, more credible offer on a home by helping sellers see that you are serious about buying.
5) You can use a large down payment as a bargaining tool. For instance, if you have a 50% down payment then you might be able to get the seller to lower the price.
6) Since your loan will be smaller you will have lower loan fees at closing.
How Much Do I Have To Put Down?
What If You Want A Down Payment But Don’t Have One?
There are several creative ways to get a down payment, but whatever you do, make sure there is a strong paper trail and everything is legit. Banks won’t put up with guesswork or “maybes”; everything needs to make complete sense to them.
Most people borrow money from family members for a down payment, but if you do that make sure you get a gift letter. You can sell a motorcycle or recreational vehicle as long as you keep an obvious paper trail and the price for the vehicle makes sense. You can use money from a windfall such as lottery money, a settlement, a trust fund or an inheritance as long as it’s trackable from A-Z. Sometimes you can even talk to your employer about programs the company might have for employees or possibly borrow against future bonuses.
Sell your stocks for the down payment before borrowing from your 401k or IRA’s because borrowing from those comes with heavy penalties. Taking out a personal loan for your down payment would affect your debt ratio which would be worse than going into a home purchase with no down payment. Along the same lines, it is not a good idea to make another big purchase, such as buying a car or an engagement ring, until after you close escrow on your house because the bank will deny your loan. Keep in mind that closing costs will be 2-3% of the purchase price.
However you find the money, having a down payment makes you look more credible to sellers and saves you money in the long run. You’ll thank yourself later.
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