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Your Savings and
Down Payment
Your First Step Toward Buying a
Home
When preparing to buy a home, the first thing many
homebuyers do is look at "homes for sale" ads in newspapers, magazines and
listings on the internet. Some potential buyers read "how-to" articles
like this one. The next thing you should do - before you call on an ad,
before you talk to a Realtor, before you shop for interest rates - is look
at your savings.
Why?
Because determining how much money
you have available for down payment and closing costs affects almost every
aspect of buying a home - including how you write your purchase offer, the
loan programs you qualify for, and shopping for interest rates.
Mortgage Programs
If you only have enough available
for a minimum down payment, your choices of loan program will be limited
to only a few types of mortgages. If someone is giving you a gift for all
or part of the down payment, your options are also limited. If you have
enough for the down payment, but need the lender or seller to cover all or
part of your closing costs, this further limits your options. If you
borrow all or a portion of the down payment from your 401K or retirement
plan, different loan programs have different rules on how you qualify.
Of course, if you have enough for a large down payment, then you
have lots of choices.
Your loan choices include such varied
programs as conventional fixed rate loans, adjustable rate mortgages,
buy downs, VA, FHA, graduated payment mortgages and all the varieties of
each.
Shopping Rates
A very important reason you
need to have at least some idea of your down payment is for shopping
interest rates. Some loan programs charge a slightly higher interest rate
for minimal down payments. Plus, the interest rates for different loan
programs are not the same. For example, conventional, VA, and FHA all
offer fixed rate loans. However, the rates vary from one program to
another.
If you shop lenders by phone, the loan officer will be
able to tell which programs fit and quote you rates accordingly. However,
if you are shopping on the internet, you have to have some idea of your
loan program on your own.
Writing Your Offer
Another reason you need to have a clue about your down payment is
because it affects how you write your offer to purchase a home. Not only
are you required to put your down payment information in the offer, but
different loan programs have different rules which also affect how you
write your offer. This is especially important when dealing with FHA and
VA loans.
If you are asking the seller to pay all or part of your
closing costs, you have to be certain your loan program allows what you
are asking. For smaller down payments, lenders allow the seller to pay
less closing costs than for larger down payments. Some loan programs will
allow a seller to pay certain types of costs, but not others.
Finally, your down payment also affects your ability to qualify
for a loan. When you make a small down payment, lenders are fairly strict
about having you conform to their underwriting guidelines. For larger down
payments, they will tend to make allowances or exceptions to the rules.
Conclusion
As you can see, the down payment affects
every choice you make when you buy a home. Although you should look at
ads, familiarize yourself with neighborhoods, learn about prices, and read
as much as you can - when you get ready to take action - the first thing
you should do is figure out how much money you have available for the
purchase.
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