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Saving
for the Down Payment
Saving
funds for a down payment should be part of an overall program to get your
finances in order prior to shopping for a home. This includes rounding
up financial records, examining your spending habits, and setting a budget
you can live with. Remember, too, that the down payment is not the only
up-front expense. An allowance for closing costs should also be included
in your savings budget.
How
much is required?
 The
down payment is usually expressed as a percentage of the overall purchase
price of the home, and varies depending on the lender, the type of financing
and amount of money being lent. In the past, the typical down payment
was 20%, but in recent years lenders have been willing to offer conventional
financing with as little as 3% down. U.S. Government financing programs,
such as those offered by the Dept. of Veterans Affairs (VA) or the Federal
Housing Administration (FHA), also require minimal down payments.
Private
mortgage insurance
Typically, if your down payment is less than 20% of the purchase price,
lenders will require you to carry PMI, or private mortgage insurance.
This insurance protects the lender in case of loan default, and usually
involves an up-front payment at closing, as well as a monthly premium.
However, once you have paid off 20% of the loan, you can request the policy
be canceled. Some lenders cancel the premium automatically, while others
require you to make a request in writing.
Gifts
If you are having trouble saving enough money, many lenders will allow
you to use gift funds for the down payment--as well as for related closing
costs. The gift may come from family, friends or other sources, but remember
that lenders usually require a "gift letter" stating the gift
doesn't have to be repaid. In addition, some lenders will also require
you to pay at least a portion of the down payment with your own cash.
Thus, if you plan to use gift money to purchase your house, ask your lender
about their policies regarding gifts.
Earnest
money
Buyers are usually required to deposit earnest money with the seller when
they make an offer. If the offer is accepted, the earnest money is then
credited towards the down payment. The amount varies widely depending
on the seller and local custom, but be prepared from the outset to have
funds earmarked for this purpose.
Don't
forget closing costs
In addition to the down payment, you will also need to save for additional
fees associated with the loan. Known as closing costs, these charges cover
items such as title insurance, documentary stamps, loan origination fees,
the survey, attorney's fees, etc. When you submit your loan application,
lenders are required to supply you with a good faith estimate of your
closing costs.
Some
buyers are surprised by the amount of the closing costs, which can easily
run into the thousands of dollars. Remember, though, that closing costs
can be negotiated with the seller. For example, you may agree to pay the
full asking price in exchange for the seller paying all the allowable
closing costs.
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