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Your down payment affects everything
Once you have made the
decision to purchase a home, you will be faced with a variety of issues that
need to be resolved. Although your main
concern will undoubtedly be locating a home for sale that you want to purchase,
another major issue that will affect whether or not you can even buy a home is
acquiring the necessary financing required to purchase a home. Unless you are one of the fortunate few who
have enough money saved to purchase a home outright, you will have to obtain
financing, primarily through a home loan.
When you search for a home loan (or a mortgage loan), you will undoubtedly talk
to a large number of lenders and mortgage brokers that will offer a variety of
mortgage loan packages of varying contract lengths with a number of terms. Despite the numerous options that you will
be facing related to the type of mortgage loan that you are able to obtain,
there is one thing that you should be certain about when it comes to obtaining
a mortgage: your down payment affects everything.
For those individuals who are unfamiliar with the process of acquiring
financing to purchase a home, for the most part the financing obtaining through
a mortgage loan cannot be used the homebuyer to pay for the down payment and
closing costs. The down payment is the
portion of the home’s sale price that the homebuyer is required to pay from
their savings. The reason why a down
payment is so important is because lenders view these expenses as security that
the homebuyer is ready to fulfill the commitments that come with purchasing a
home, such as paying off monthly mortgages.
As a result of this, the amount of savings that a homebuyer has that they are
able to use for a down payment and closing costs is incredibly important to
loan sources. Down payments will affect
everything about the mortgage loan that you are eligible for and even whether
or not you are even able to obtain a mortgage.
The less money you have available for a down payment, the higher the
risk you are for lenders. Consequently,
you will only have a limited amount of mortgage loan programs available for
your choice. However, the opposite is
also true. Therefore, the larger the
down payment that you are able to afford, the larger the number of mortgage
loan programs that you are eligible for.
In addition to the amount of
savings that you are able to devote to paying your down payment, there are a
number of other issues related to your down payment that will affect your
mortgage. For example, Jonathan McKay
is a pharmacist in Delaware that was interested in purchasing a three-bedroom
home but did not have enough capital to leave a large down payment. Aware that his mortgage plan options would
be severely limited, Jonathan received a gift from his parents that would be
used to pay all of the down payment.
Overjoyed with this news, Jonathan went to speak to his loan source only
to leave their meeting feeling glum.
This was because he had just learnt that prospective homebuyers whose
down payments are covered either fully or partially from a gift will still find
that they are considered somewhat financially risky and will still only have a
limited number of mortgage plan options available to them.
For those individuals that
are relying on their 401K or retirement plan to pay for their down payment,
they will find that obtaining a mortgage loan will be difficult. This is because different loan programs
contain different rules related to qualification. Some mortgage loan programs have no clauses related to clients
that use a 401K or retirement plan to finance their down payment, whereas other
mortgage loan programs have strict rules related to this scenario.
The availability of mortgage
loan plan options are not only limited to the amount of money that a
prospective homebuyer is able to commit to a down payment. Additionally, there are closing costs that
the homebuyer is responsible for.
Closing costs refer to the fees charged to services that are required to
finalize the home sale. Closing costs
include such services as title searches, appraisals, attorney’s fees, title
insurance, and real estate agent’s commissions. These fees are divided between the homebuyer and home seller
depending on how both sides of these transactions decide to divide the
expenses. However, for some homebuyers,
they are unable to cover their side of the closing costs. In these scenarios, they require that their
loan source or the home seller cover part or all of their closing costs. As a result, if a homebuyer is able to pay
for a down payment but require help to cover their closing costs, they will
find that they will only have a limited number of mortgage plan options open to
them.
However, for individuals who
are able to leave a large down payment and cover their closing costs, they will
find that they have an almost unlimited number of mortgage plan options open to
them. Typically, the conventional
mortgage requirements of a down payment range between 15 percent and 20 percent
of the home’s sale price. If the
homebuyer is able to meet this requirement, they will be able to choose between
a number of mortgage loan packages.
These loan packages will range in terms, number of years, and the amount
that the homebuyer is eligible to obtain.
To illustrate the types of mortgage loan packages that a homebuyer who
is able to make a large down payment are eligible for, here is a small
smattering of mortgage loan options that are available to these types of
homebuyers:
Conventional fixed rate loans: This refers to the most common type of
mortgage loan plan that is available in which interest rates are fixed
throughout the lifespan of the loan.
They are a popular type of mortgage plan because it gives the
homebuyer predictability in knowing exactly how much interest that they
will pay over the term of the loan.
Conventional fixed rate loans come in a variety of packages that
vary in contract terms and length of loan time.
Adjustable rate mortgages: This refers to another popular type of
mortgage loan in which interest rates fluctuate in relation to national
interest rate levels. Therefore
mortgage payments will change periodically, which has the advantage for
the homebuyer that they are receiving a lower monthly mortgage rate
compared to homeowners who are on a conventional fixed rate loan. Additionally, there are usually lower
initial interest rates for adjustable rate mortgages that make it more
attractive for prospective homebuyers to obtain. Similar to conventional fixed rate loans, adjustable rate
mortgages come in a variety of packages that vary in contract terms and
contract length.
Buydowns: This refers to a financing plan that enables homebuyers to
qualify for a larger loan that can allow them to purchase a higher priced
home. With an interest rate buydown,
the homebuyer pays for extra points up-front in exchange for a lower
interest rate applied to their mortgage plan for the first few years. There are many variatatons to the
buydown package and it is a popular financing plan.
VA Financing: This refers to a form of mortgage financing that is available to
veterans and other former military personnel. Through a VA plan, the homebuyer receives mortgage insurance
premiums that enable the homebuyer to obtain conventional mortgage
financing in lieu of being unable to leave a large down payment or pay for
closing costs.
FHA Financing: Similar to VA Financing, FHA financing is a government program
designed to enable prospective homebuyers from acquiring mortgage loans
when they do not meet the criteria.
By offering mortgage insurance premiums, homebuyers are able to
obtain conventional home financing despite being unable to leave a large
down payment or pay for closing costs.
Graduated payment mortgages: This refers to a form of mortgage financing
that is available but is rarely used.
Under this package, the homebuyer enjoys low initial payments that
increase over the course of the loan’s term. The reason for this is that an assumption is made that the
homebuyer’s financial situation will improve over the years and this will
enable them to pay off the increases in the mortgage.
Regardless of the mortgage plan that you decide on, the down payment will
determine a number of factors involved in your mortgage financing. In many mortgage packages, there are restrictions
placed in the way that you conduct your home purchase. For example, an individual that receives
their financing through a VA or FHA loan are required to mention the fact that
they are receiving this form of financing when they are writing their purchasing
offer. The reason for this is that
these types of loans stipulate that the homebuyer cannot pay for any of the
closing costs. Therefore the fiscal
responsibility for settlement services fall solely on the home seller. VA and FHA loans are popular ways of home
financing for homebuyers that are unable to pay closing costs and a down
payment. Popular government programs
that are designed to enable individuals fulfill their dreams of purchasing a
home, the VA and FHA loans do leave restrictions in the way that a homebuyer
can purchase a home.
Although
your down payment affects everything, it is still up to the homebuyer to
negotiate the most advantageous mortgage plan that they can. Even though the size of your down payment
will affect the number of mortgage plan options that are open to you, it still
requires negotiation with a number of lenders and mortgage brokers for you to
obtain the best mortgage financing plan that you can. This is something that your down payment does not stipulate.
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