Buyers nowadays have access to unlimited resources when it comes to researching real estate, specifically the process of taking out a mortgage and purchasing a house. The problem with feeding on multiple sources (with some having questionable credibility) is that you’re not quite sure which ones are true, updated, and relevant to your situation. When you’re a first-timer in home-buying or you haven’t made a purchase in a long time, there are misconceptions that could plague your attempts to plan your down payment.
You’ll be surprised at how common it is for people to believe and act on misconceptions regarding down payments. If you want to make sure your decisions aren’t influenced by any of them, you must learn the most pervasive ones that haunt buyers.
You Only Need a Down Payment to Get Started
Maybe you’ve found the house and land package that’s perfect for your family, and you’re almost finished saving for your down payment. Before you mark your calendar for the day of your big move, it’s essential that you prepare the other fees that will bring you to the closing table.
That’s right, simply having the down payment isn’t enough to get a house signed over to you. There are cash reserves and closing costs needed to finalize the transaction. The specific sum varies per buyer, but you can expect that your closing cost will include origination fees, inspection fees, and even appraisal fees. You may lower the cost on your end by negotiating the split between you and the seller, but expect that this will inevitably increase the amount you’ll spend to buy your dream home.
It Must Always Be Cash
It’s stressful to think that your only option in paying your down payment is cash, especially when you have other assets you can use as collateral. The good news? You can use collateral as long as it’s acceptable and sufficient for your intended purchase. If you’re going to use bonds and stocks, then you won’t need an appraisal. You’ll want to reserve that for assets that aren’t as liquid, like other properties and even gold. Once you follow the due process and receive the lender’s approval, you could move into your home without spending huge amounts of cash.
The only precaution you have to take is using collateral with fluctuating values. When this happens, you’ll be required to add other assets as collateral, and failing to do so may face foreclosure.
20% is the Magic Number
There was a time when this was true. Nowadays, however, there are loan programs that demand much less. If you’re going for programs backed by the government, you may only need around 3.5 to 5 percent down payment for your home. While this is ideal for a lot of people, it’s not to say that it’s the best course of action. Remember that anything less than 20 percent will necessitate mortgage insurance, which you have to avail for the protection of your lender.
The amount you’ll be cashing out is small, but even small amounts can lead to big sums in the long run. As a rule of thumb, down payments that are 20 percent and bigger are always better, but if that’s not possible for you, know that you have options.
You Can’t Get Down Payment Assistance
Should you need help to come up with your down payment, you can depend on down payment assistance. Even if you’ve purchased a home before, you can still qualify for one if you haven’t made any purchase within a certain number of years. Check how this is applicable to you depending on where you live or where you’re planning to buy.
LMI is Always A Great Solution
As mentioned before, you’ll need to get a lender’s mortgage insurance (LMI) if your down payment is less than 20 percent. This gives your lender protection in case you default on your loan somewhere along the line. Whatever the LMI costs will be added to your monthly payment, making it bigger than what you might have the capacity to pay.
If you’re concerned about the amount of money you’re throwing away in the long run simply because you settled for a smaller down payment, then consider waiting. Save up to 20 percent to avoid PMI and enjoy lower monthly mortgage dues.
The way you handle your down payment could be the key to purchasing your dream home without the added stress. Think about which misconceptions you’ve fallen for and how to correct them. Once you’re more confident about your choices, you can dive into homeownership with confidence.