Buying a home is one of the biggest financial milestones youíll reach in your life. If youíre a first-time homebuyer, it can be scary to take the plunge and make a down payment on your first home.
Down payments are one element that makes up the factors which determine your monthly mortgage payments, and in turn, how much youíll be paying toward your home in total. So, itís important to understand just how much to save for a down payment.
In this article, weíll talk about down payments, why they matter, and your options for saving up for a down payment.
A down payment is simply the amount of money a buyer pays at the time of closing on the house. Down payments help assure lenders that you will make your monthly mortgage payments because you have invested a substantial amount of money into the house and therefore risk losing your down payment if you fail to pay the mortgage and your house is foreclosed on.
If youíre eager to buy your first home, you may want to make the smallest down payment possible so you can move in sooner. However, a smaller down payment typically means a larger monthly mortgage payment. Thatís because your mortgage payment depends on several factors.
When a lender determines how much they will lend you towards your home and how much your monthly mortgage payments will be, their formula takes into account your down payment, your credit score, and the value of the property. The higher your credit score and the higher your down payment is, the less your monthly payments will be.
Many first time home buyers cannot afford large down payments on their first home (20% or more). As a result, there are loan types insured by the Federal Housing Administration that are offered for as low as 3.5% of the mortgage amount.
If you arenít approved for an FHA loan but plan on making a down payment of less than 20%, you can still buy a home with private mortgage insurance (PMI). With PMI you pay a monthly premium for your insurance in addition to your monthly mortgage payments.
So, how much should you save? The short answer is as much as possible. However, if you need to move soon because of life circumstances, it isnít always an option to hold off on moving for long periods of time.
If youíre currently renting each month at high prices, it might make more sense to put that money towards your first home, an asset which will likely increase in value, rather than spend it on rent which you get no return on.
One of the best ways to save for a down payment is to set up a new cash savings account that will automatically deposit a portion of your paycheck each week. Having an off-limits account is a great way to save without the temptation of spending it on luxuries if the money would normally be sitting in your checking account.
Another option is to start investing. If youíre in no rush to buy a home and have the financial resources, investing pays off much more than a savings account does when it comes to increasing assets.
Regardless of how you choose to save, the most important takeaway is that you take action now to start saving and you donít deviate from your savings plan for any reason.
Thereís numerous reasons why the name on a title to a home may not be the same as the name thatís on the mortgage loan. These reasons include:
No matter why this is the case, having your name on the mortgage but not on the title to a home can affect you and people residing in the home in different ways.
If people are looking to get a home or refinance a home, but only one person has good credit a decision must be made. For the best possible mortgage rates, youíll want to person with the best credit to be the primary loan holder. This may mean that you need additional legal documents in the process.
The person with lower credit may still be able to have their name placed on the title to the home. Anyone who plans to contribute financially to a home, even if not on the mortgage, should place their name on the title. This would be one instance when a name would be on the title to a home and not on the mortgage loan. In this case, a person has property rights, but no legal-financial responsibility to the home. Itís important to agree on the home arrangement that youíre considering. This would be done through a will or a legal contract. This way, all parties are protected in regards to the ownership of the home should something happen to the individual whose name is on the mortgage.
Those who are listed on the mortgage are the people who are responsible for house payments. If a personís name isnít on the mortgage, it doesnít release them from complete responsibility from the home. If your name is on the title to the home but not on the mortgage, the bank generally has first dibs on the home if thereís a lapse in payments. If you want to keep living in the house, youíll have to keep making payments on the home. If you canít make the mortgage payments, youíll risk going into foreclosure.
An issue that can come up if your name is not on the mortgage is that you cannot use the home youíre living in as a tax deduction. Even if you make payments on the home, in order for you to get tax benefits, your name must be on the mortgage stating that youíre legally responsible for the home. If you are paying for the mortgage because your name appears on the title to the home, you arenít legally entitled to pay, giving away your rights to tax benefits. If youíre married, filing jointly, and only one name appears on the mortgage, however, you can use this as a tax deduction. This becomes an issue if two unmarried people buy a home together.
Whenever you have an issue with the title of your home or with names on the mortgage, itís good to consult legal counsel. The attorney can assist you in determining who is legally responsible for the home and if the people listed on the title of the home are correct. This can help save you from trouble at a future date.
Since credit scores and loans can get messy at times during the home buying process, itís good to understand all the implications of home mortgages and titles.
Owning a house gives you a sense of fulfillment, and helps boost your self-esteem. It is a long term investment and should not be taken lightly. The present state of your finances is possibly the single most important factor when contemplating home ownership.† Before you start shopping for a house, take into consideration the following factors. Have you set aside enough money for the down payment? †The amount you need varies based on the price of the home and percentage required by your lender. †Zero down mortgages are possible, however the interest rate is typically very high increasing the amount paid out over the life of the loan. Private Mortgage Insurance (PMI) is typically required for this type of loan, again increasing your monthly payment. How high of a mortgage payment can you afford to make ? †If you opt for a fixed rate, your payment would remain consistent throughout the period of the loan. This type of loan is favorable for future financial planning. † Adjustable rate mortgages make it a bit trickier to predict your monthly payments based on the fluctuating interest rate throughout the duration of the loan. †This type of loan could be risky if interest rates rise and your payments increase significantly higher than anticipated. The security of your financial future is paramount when acquiring a mortgage loan. †You would not want to enter into this long term investment without stable employment and a definite career path. †Most banks and lending companies require a borrower to have been with the same employer for at least 2 years before considering a loan of this nature. Secure financial footing is key when applying for a mortgage loan. When determining your readiness to purchase a home, your credit score is as important as your finances. If you have a low credit score, youíll attract a higher lending rate. This implies an increase in the amount paid back to the lender over the duration of the loan. An excellent credit score of 720 or above attracts the best interest rates and repayment terms. If your credit score is too low, improve it by:
There are lots of different types of mortgages out there but the most popular mortgage is a fixed-rate mortgage. A fixed-rate mortgage has†a fixed interest rate for the entire term of the loan. The interest rate is determined at the loan's origination. One of the main advantages of a fixed-rate mortgage is that the loan payment amounts will stay the same for the life of the loan and will not fluctuate with interest rate movements. Lenders offer 50, 30, 20, and 10-year fixed loans. The two most popular are the 30 and 15 year fixed loan. A 30-year fixed loan†amortizes over thirty years, with the majority of early payments going toward interest, later payments go mostly toward the principal. A 15-year fixed loan, amortizes over fifteen years, and significantly reduces the amount of interest paid on the loan. When considering a mortgage understand and measure risks of all the different types of mortgages.
If your dream of owning a home has been crushed by a mortgage denial you are not alone. According to the Mortgage Bankers Association, about half of the applicants who have applied for a mortgage have been turned down. But don't lose hope. † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † † Here are some ways to boost the odds of your next mortgage application getting approved: 1. Know why you were rejected. If you are rejected for a mortgage by law you will be given a formal "adverse action" notice from the lender. The reasons for rejection will be outlined in the notice. Some examples of why you could be rejected are: a low credit score, high debt load, or insufficient income. 2. Not all lenders are the same. Guidelines differ so get†a second opinion. 3. Have a bigger down payment. A down payment of 20% of the home's value will increase your odds and lower the lender's risk. 4. Check your credit first. At least six months before you apply for your loan request your credit report from all three credit reporting agencies. Clean up any errors on your report. Corrections may take 60 to 90 days to show up on credit reports. 5. Improve your credit score by avoiding late payments, getting current on delinquent accounts and reducing debts. †Make sure all of your†credit card balances are below 30% of your credit line and reduce your debt-to-income ratio to 36% or less. Follow these tips and you will be well on your way to homeownership.