Cash is King

Posted by Tim Ryan on Sunday, November 20th, 2011 at 2:18pm.

How your Down Payment Drives the Home Buying Process

So you have decided that you are ready for homeownership. Logically you think the first place to start is looking at homes on the internet. That is a worthwhile exercise as it will help with some of the initial fact-finding and questions you may have, but prior to calling an agent or rushing out to look at homes, the best place to start is with your own finances.

The reason being that the amount you have saved for a down payment and closing costs will affect every other aspect of the transaction from the contract terms, loan availability, rates you qualify for, and which homes are attainable.

Financing Options

These days, the minimum down payment for some loans can be as low as 3%, but for most the minimum is 5%. If you are able to only put down the minimum, this will affect which programs are available to you. Conversely, if you have a large amount to put down, there are several different ways you can structure your loan(s). If you need assistance from the seller for closing costs or are obtaining your down payment via a gift from someone, your options are more limited. Throughout the underwriting process, the lender will be carefully be examining all of your financial records.

This includes everything from tax forms to bank statements, credit cards, alimony or child support, and any cash deposits. Typically, they look at all your accounts upon your initial meeting, and then at least once more immediately prior to funding your loan. All monies must be documented as to where they came from and what they are for. This is non-negotiable, so if your parents are giving you a gift, the bank will need documentation of the money leaving their account and being deposited into yours.

Rate Comparisons

When you hear advertisements for super low interest rates, those numbers are all based on best-case scenarios, meaning substantial down payment and good credit. Rates go down as the down payment increases. Rates also differ based on the type of loan.

For example, conventional, FHA, and VA all offer fixed rate loans, but the rates differ based on the program and lender. To get a more accurate idea of what would work best for your situation, it would be best to call a few different lenders. Speaking to someone with whom you have provided your personal information will give you more factual information than guesstimating on the internet.

Writing The Offer Once you have done your financial homework and found a home you would like to purchase, it is of course time to write your offer. The amount of your down payment is part of the contract. From the seller’s perspective, a buying with a greater down payment amount is less of a risk and the buyer could be perceived as more likely to follow through with the purchase.

Also, for FHA and VA loans, lenders have stipulations on how much they will allow the seller to contribute to your closing costs. This is directly affected by the amount of your down payment. Less down payment equals less closing cost assistance. So your down payment affects your offer in a couple different ways.

Summary As you can see, more cash allows for more flexibility in the homebuying process. Good credit is also important. Lenders love working with folks that have both. So, if homeownership is a goal of yours, the very best things you can do to make that dream a reality is save up for a nice down payment and watch your credit. About

The Author: Kimberley Kelly is an experienced Palm Springs short sale expert helping home buyers and sellers in the Palm Springs real estate market. If you're interested in learning more about Kim, please visit her La Quinta real estate for sale website.

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