Over the past six months, there has been an increased number of loan programs available. Lenders know that to grow their portfolio they must find ways to attract prospective buyers. While we will never see the stated income and reduced documentation conventional programs again, there are more options than at any point in the last five years. Trying to figure out the best program for you, your goals and your current situation can be quite confusing at times.
Many times, the starting point in the loan process is the down payment. There are programs that best fit for you, depending on you and your current situation. Here are three questions that will help you determine which is the right down payment for you.
How Much Capital Are You Starting With? The buying process can be quite confusing at times. Trying to understand the lingo and digesting the numbers is often a real challenge. Instead of hearing about what programs are available start by evaluating your current assets. It is important to keep in mind that your down payment is not the total amount you will need for the closing. There are property tax escrows and closing costs that must be factored in. Depending on the annual taxes this total will be thousands of extra dollars. As you will see, just because you have the assets doesn’t mean you should use it on the down payment. However, if you don’t have the money you need to weigh where you would get it from. It is often best to determine exactly how much you want to allocate for the total down payment prior to exploring program options.
Monthly Payment Goal. Everyone wants the lowest down payment possible. However, there are times when having 20% down doesn’t mean you should use it. You should sit down with your lender or mortgage broker and evaluate what you are getting for the larger down payment. Generally speaking the lower the loan amount, the lower the payment. Also, with any conventional loan less than 20% down there is private mortgage insurance (PMI) included in the payment. However, there are PMI eliminating programs that will give you a higher rate but with no PMI actually be a lower payment. There is a lot to digest with a new mortgage but remember that you are in control. Always determine where you want your monthly payment to be and then sit down with your lender to figure out ways to get there.
Does The Property Need Work? Getting into the house should not be your ultimate goal. It doesn’t do you any good to close on the property only to find out within weeks you are not happy with it. As you decide what you want to offer and how to structure your loan you should evaluate if the property needs any work. Updating the kitchen or changing the bathroom can end up costing thousands of dollars that you will need to come up with. If you have the money you can either pay for it with your savings or put the improvements on a high interest credit card. If you cannot finance the labor, you will be forced to scramble around to find the money to do the work you want. Start by getting an estimate on the repairs and work backwards from there. This will reduce your down payment and increase your mortgage payment but when you factor in the credit card payments it may turn out to be in your favor.
Never settle for the first loan program that is offered. There are different loan programs for any down payment and several PMI reducing options. Once you figure out how much total down payment you want to use and where you want your payment to be, your lender should help find a program that you are happy with.