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. An allowance for
closing costs should also be included in your savings
much is required?
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 lent. In the past, the typical
down payment was 20%, but in recent years lenders
have been willing to offer conventional 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.
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 in case of loan default, and usually
involves an up-front payment at closing, as well as
a monthly premium. However, once you have paid off
20% of the loan, you can request the policy be canceled.
Some lenders cancel the premium automatically, while
others require you to make a request in writing.
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
gift may come from family, friends or other sources,
but remember that lenders usually require a "gift
letter" stating the gift doesn't have to be repaid.
In addition, some lenders will also require you to
pay at least a portion of the down payment with your
own cash. Thus, if you plan to use gift money to purchase
your house, ask your lender about their policies regarding
Buyers are usually required to deposit earnest money
with the seller when they make an offer. If the offer
is accepted, the earnest money is then credited towards
the down payment. The amount varies widely depending
on the seller and local custom, but be prepared from
the outset to have funds earmarked for this purpose.
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.
are surprised by the amount of the closing costs,
which can easily run into the thousands of dollars.
Remember, though, that closing costs can be negotiated
with the seller. For example, you may agree to pay
the full asking price in exchange for the seller paying
all the allowable closing costs.