Besides determining whether or not you want to own a house and can you afford mortgage payments, ”do I have enough for a down payment?” is the next most important question any first time home buyer should ask him or herself.
What’s the Down Payment For?
The theory is that when a borrower puts a significant amount of their own money into the purchase of a house, they are less likely to “walk away” from their obligation to repay the mortgage because they don’t want to lose their own money.
An example of that would be, a person buys a $500,000 piece of property. If they put 10% or $50,000 of their own money towards the purchase, when things get tough, they are less likely to let the loan default. Why? Because not only will they loose their place of residence, they will also loose their $50,000 dollars, and that kind of money’s not easy to come by for most of us.
The recent crash in the housing market where 0% financing was running rampant has proven the above theory to be a sound one. I was told by a fellow realtor of a client who had purchased a home with 0% financing who walked into the bank he borrowed the money from, put the keys to the house on the loan officers desk and said, “Here you can have your house back.” He was having a hard time making the payments and decided to simply walk away from the house. True, his credit would be trashed, but since he put no money into the house, he didn’t loose any. 0% financing is a thing of the past, for now.
How Much Down Payment Money Do I Need?
Today in 2009, with the exception of an FHA loan where you can put 3.5% down on a piece of real estate, most lending institutions require that you have at least 10% of the purchase price to put down when you want to buy a house, condo or co-op. In some circumstances a lender might require even more.
So, if you want to purchase a co-op in Brooklyn for $200,000 and 10% down is required, you will need at least $20,000 for the down payment. (FHA loans are not available for co-ops)
If you want to buy a house for $400,000 and you qualify for an FHA loan, you will need at least $14,000 or 3.5% of $400,000 for a down payment.
So, before you start searching craigslist.com or going to open houses, or you make that call to your local realtor, you have to have enough money for a down payment before you can purchase that dream home.
If you would like more information about down payments or house buying in general, feel free to give me a call.
