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Friday, August 3, 2012

The Down Payment Explained

When you buy a house you have to have enough money upfront to put down which is called a down payment.  These days putting down at least 20% of the sale price for a down payment is normal. However, there are cases where a person may qualify for 0% down payment, but you must have a credit score range of 700 or over. In addition, those who qualify for Veterans (VA) loans may also get a down payment waver depending on the lender.

Lenders (banks) use the down payment as a safety gauge. There was a study done showing the correlation between those who can't make a down payment and their tendency to default on their loans. The lenders reasoning for down payments are; if a person can't afford a down payment then they can't possibly save their money for a monthly mortgage. They contend if  you cannot  pay for a down payment then they most likely cannot afford a mortgage either.

It's almost a given that if one does not pay a down payment that the monthly payments will run higher. The less you put down in the front the more it will cost monthly when you buy a house, that's how it works. If you are paying a larger mortgage and do not have a steep bank account then you will have less options to choose from in terms of picking a home. One of the plus things from a down payment on a home is that it affords you the luxury of asking for a larger loan. With a larger loan you have more funds to get the type of house you really want.

When you don't put anything down on a conventional loan then more than likely you have to get a private loan as well. This is because the rule for getting private loans apply when you are putting down less than 20% of a mortgage. The private loan is called PMI or Private Mortgage Insurance. The lender requests you also get PMI because it protects the lender in case you default on the payments. The PMI will then pay the lender the difference between the 20% and the part you actually applied to the loan.

For instance if you put down 5% and default on the rest; the PMI pays for the outstanding 15%. This protects the lender and lets you get a house without putting down 20% as a down payment first. In the past lenders/banks would not even consider giving someone a loan for a home; without a 20% down payment towards the house. Now with PMI's it makes it possible to take a loan with as little as 5% down towards a home purchase. PMIs are added to the mortgage and paid as part of it. You do not need a PMI once you have paid up to 20% of the mortgage back. It's a safe guard for the 20% that would have served as a down payment.

For more information, please feel free to contact Team Carstensen.  

1 comment:

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