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Down Payments

Down Payments

Let’s Get “Down” with Payments.

If you’ve ever purchased a home, or anything with a payment plan for that matter, you’ve heard the words, “how much can/are you putting down?” For the sake of this article, we’re going to talk about the down payment’s role in real estate.

A down payment is an initial payment, usually done in the early process of a purchase. It is a portion of the total amount, with the remainder usually being financed. Often, this deposit is paid in cash, in the form of a check, money order, or wire transfer, and is non-refundable.

Now, keep in mind a down payment is different than closing costs. To read more on closing costs, check out the article on our website.

First, we need to understand that the amount of a down payment depends entirely on the type of loan and your situation. There are some, like VA loans, that may require no money down. An FHA loan, depending on your situation and credit score, can be as little as 3.5%. For most conventional loans, if the down payment is less than 20% there will likely be insurance added to your monthly payment. For most investment properties, if done through a conventional mortgage, at least 20% down is required.

The fact of the matter is, not everyone can afford a down payment, whether it’s 3.5% or 20%. Don’t get discouraged. There are options out there, and some that require very little if any of your own money. Remember we’re all about OPM (Other People’s Money)!

Make sure you do your research. There are actually a number of programs that assist with down payments in every state. Each state is different, so your due diligence is necessary, especially if you plan to invest outside of the state you reside in. The qualifications for these programs differ from state to state and are based on personal/financial situations. These programs will also include information for First Time Home Buyers, which in most cases is anyone who has not owned in the last 3 years.

What if you have someone that is willing to give you the funds for a down payment? Short answer…great, long answer…this comes with some regulations. You must divulge that the down payment is indeed a gift and that repayment of this “gift” is not allowed. By repaying the money, it would be as if the gift were a loan and that could be considered mortgage fraud. You also need to be sure you’re keeping detailed records of the movement of the money. Banking notes, transfer notes, and paper trails will also ensure the money is coming from dependable source and it will be there come closing.

Now that we’ve discussed your options if you don’t have the funds for a down payment, what about putting down more than what’s required? Is this a good idea and will it really help us in the long-run? Again, everyone is in a different situation but for some, this may be a way to reduce your monthly mortgage payments. The interest on your mortgage is not compounded. It’s simple interest, meaning that you cannot gain interest on your interest. Sounds complicated, I know. All you really need to understand is this means the larger the down payment the less the amount you will ultimately owe on your house, because you will be charged interest on a smaller amount. It’s also important to keep in mind that many lenders will provide a better interest rate, the more money that’s put down.

Seems like the logical thing to do, right? If you have the funds, why not put more down, and get a better interest rate and lower monthly mortgage payments? Well, you’ve probably heard the sayings about home ownership. If something can go wrong, it probably will. It’s imperative that you leave yourself an “emergency fund” so that when your water heater breaks you can get a new one. What about a new roof or a much larger emergency? You would never want to use all your savings just to make a larger down payment. I promise you’ll need to dip into that savings when/if something goes wrong.

Long story short, do your due diligence. Find assistance programs in your area and really analyze your financial situation before determining your down payment amount. Here at Legacy, we can teach you the steps to owning a home, no matter what you’re working with financially.

Areas of Review

Takeaway

Big picture takeaway points

  1. For most investment properties, if done through a conventional mortgage, at least 20% down is required.
  2. There are several programs that assist with down payments in every state. Each state is different, so your due diligence is necessary, especially if you plan to invest outside of the state you reside in.
  3. The larger the down payment the less the amount you will ultimately owe on your property.

Reflection

Self-reflection questions to think more about the content

  1. Have I looked up the programs that my state offers for help with down payments?
  2. Many programs are offered for first home buyers. Have I used this before?
  3. Do I know what’s required? Do your research on the lender you will use before putting an offer on a property to ensure what you need to put down.

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