When Buying Your First House – Do You Need A Down Payment?

Depending on your credit rating, a mortgage institution will advise you as to how much you can borrow and the interest rate they will charge you. Most lending institutions appreciate the customer who has been prequalified. I have done this but see very little usefulness in it unless you plan to buy very shortly.

The lending institution will check your credit history and employment before the qualification. The better your credit history, salary and the lesser your current debt (like credit cards and installment loan), the more apt they are to preapprove a loan. Of course you are under no obligation to give that lending institution control of your mortgage until the papers are signed.

Now about down payment. There are several schools of thought on this subject. My theory is the more down payment, the lower your monthly mortgage payments. Most lending institutions have requirements in this area. Some, as low as 3% and some as high as 20%. The same lender can require different percentages depending on your credit history, the amount of loan needed and the value of the prospective property.

You may want to reduce the amount of down payment to have some reserve money for remodeling or just furnishing the home. The one advantage of more down payment and less mortgage payments per month is that, if times get tough (you lose a job or your partner loses their job or sickness enters the picture), your monthly obligations will be more affordable.

Where do you go for your down payment? Retirement funds are one source but only if you are very young, let’s say 20’s to 30’s. From my experience, I personally feel it is a mistake to take retirement funds to make a down payment. Much better to use an inheritance, save yourself or win a lottery (laugh!). Some borrowers have taken a second mortgage to fund their down payment. This can really put a lot of stress on your budget. However, if you are serious about owning, you may be willing to struggle for a while. As your income grows, providing you have a fixed rate mortgage, your monthly mortgage payments become more affordable since they are fixed.

It’s not easy to save for a down payment but it is possible. Cut your expenses by cutting back on some unneeded extra’s and save the money instead. Allocate a certain amount for groceries and stick whatever is left at the end of the period in the bank. Conserve on energy and put the money saved in the bank toward your down payment. Put a chunk in a mutual fund and let it grow. Be careful in selecting the mutual fund. These are only a few ways to acquire your down payment. Rome wasn’t built in a day and neither will your down payment be accumulated in a day.

As you approach obtaining a mortgage, you will find all kinds of variations. Some of these are interest rates, term of mortgage loan, type of mortgage and down payment requirements. Most of these items are contingent on the amount of the mortgage application versus the appraised value. Some mortgage lenders require taxes and insurance to be escrowed within the mortgage terms. This is an area where you should shop around. I have some friends with a mortgage on their property. Their lender allowed them to manage their own escrow. They fell behind in their property taxes and when the lender discovered the delinquency, paid all back taxes and forced them to escrow. The consequence of their delinquency was that their mortgage payments skyrocketed because of the delinquencies. The lender is only concerned with their interest in your property.

The more you borrow, the better the terms you will receive. Just remember, all the money you borrow for a down payment has to be paid back . . .the easy part is the borrowing.

When buying your first house you will need to make a down payment, whether it is a large percentage of the sales price or not will have to be negotiated between you, the buyer, and the lender you choose.