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The Art of the Downpayment

There is an art to figuring out exactly how much of a down payment you should make on a house. But don’t let the basic concept of a down payment deter you from searching for your new home.

 

So, what is considered an appropriate down payment?

Well, typically putting down 20% of the cost of the home will help you to avoid paying private mortgage insurance. And typically 20% is viewed as a good “average” amount to put down on a house. There is a fair amount of people out there who will encourage you or even require you to make a 20% down payment (if not more)! But that does not mean 20% is absolutely what you have to pay. If you have the 20% saved? Put it down. It will bring the amount of money you need to borrow for your mortgage significantly less.

 

Just because you have it, though, does not mean you need to spend it. And, yes, this does apply to down payments, too. Paying for more than 25-30% for your down payment may not be the best investment for you. Even though you may have the “cash” on hand, it is important to take other costs into consideration before you do. Those other costs range from closing costs to realtor fees to general maintenance of your home.

While it may seem like a great idea at the time, making a large down payment may not be the the ideal move for you in the future. Other options, besides making a large down payment, can be taking out a mortgage with a shorter term- so 10 years rather than 30, for example. You will ultimately pay less in interest and will have more “cash” on hand in the meantime. If you have questions about what is the best move for you, talk to one of our experienced loan officers. They can take a look at your unique situation to find what is best for you.

The Under 20 Crowd

Now, just because you don’t fall into the 20% or “more” categories doesn’t mean you can’t actually afford to buy a home. In certain areas (and in certain situations) you have the ability to put down as little as 0%. The USDA and VA loans offer 0% down, MSHDA offers 1% down, and FHA offers 3.5% down. Each of these options definitely makes purchasing a home significantly less daunting and more approachable for many buyers, especially first time buyers.

Like we mentioned before, if you are putting down less than 20%, you will be required to pay private mortgage insurance (PMI). What is it? Essentially insurance for your lender, in the event you foreclose on your home. And, as the borrower, you pay the premiums. The average cost of PMI can range from $30-$100, depending on the amount you make for your down payment. While that may seem like a lot of money to pay on top of your monthly mortgage payment, it does allow for you to purchase a home without making a huge down payment. Just think about it- 20% of a $300,000 home is $60,000. An additional amount of money each month can be called a “small-er” price to pay to buy the house of your dreams.

Now what?

The most important thing we can recommend is talking to a loan officer. Every individual situation is so unique. Not everyone can easily fit into a predefined category. The best approach is to talk about the amount you can put down, the monthly payment you can afford, the other factors in your life- with someone that has experience in the mortgage industry.

Don’t just take our word for it- we have so many happy clients (and new homeowners) who are happily living in the house of their dreams.

Total Home Lending

Natasha Mason

 

The Art of the Downpayment2020-09-28T15:14:20+00:00

Millennials & Mortgages

Do you fall into the category of recent college graduate?

By today’s standards, recent can mean anything from one to, say, five years. Maybe even more. But you went to college, took out student loans and are now thinking about buying a house. Currently, many millennials who recently graduated from college have, on average, just under $40,000 in loans. And that’s before graduate school.

That amount of debt is definitely enough to deter many of these millennials from even considering applying for another loan. As for a home loan? That’s a new loan… And a sizable down payment. While budgeting for student loan payments, saving up for a down payment can sometimes be a bit of a stretch.

Sure it’s a little scary. But regardless of the amount of debt you have post-graduation, you cannot necessarily allow it to deter you from buying the house of your dreams.

 

Our advice?

No matter how beautiful or perfect the house, do not throw rationality to the wind.

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Debt is still debt.

And it is important to recognize how that plays a factor in you obtaining a mortgage.

 

The debt-to-income ratio

Let’s discuss your debt-to-income ratio (DTI). Even if you’ve never heard of that term before, what you’re thinking is most likely spot-on. Your DTI is the percentage of your monthly income you spend on debt. Whether your monthly income is $3,500 or $10,000, the amount of money you dedicate to “debt” each month will factor heavily on your eligibility for a mortgage.

As for what is considered debt… Mortgages, student loans, car loans, minimum credit card payments. Any and all of these different forms of “debt” will factor into your DTI.

Breaking it down: you make $30,000 a year, $2,500 a month. You have a $350 student loan payment, $250 car payment and a $100 minimum credit card payment. Your DTI is 28%.

This ratio is used by lenders to determine your ability to manage your current monthly payments, while still able to make your monthly mortgage payments. According to Consumer Finance, an ideal DTI is at 33%. Evidence has shown that borrowers with a higher DTI is more likely to find it difficult to make their monthly mortgage payments. At the higher end of the scale, 45% DTI is considered a standard cap. However, with good credit or an additional down payment, a higher DTI may be considered.

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Some options

So, you have student loans. You’re looking for a house. And you’re looking for a little advice. There are a few different options.

First, it is essential to manage your loans (and your other debts) appropriately. You have the ability to adjust your student loan payments from “standard” to “graduated.” A graduated payment plan adjusts your monthly payment, starting low and gradually increasing as time goes on. Hence, graduated repayment. Another alternative? Income-based payments. This payment plan can, depending on your income, can reduce your monthly payments and, thus, reduce your DTI.

Another option, reduce your debt before searching for that perfect home. Whether it is paying off your credit card bill entirely or making a significant dent in your student loans, reducing your overall debt can make you eligible for a mortgage.

Finally, you can look into FHA loans. These are mortgages that are insured by the Federal Housing Administration. With this type of mortgage, borrowers are required to pay for mortgage insurance, which provides security for the lender. Essentially, if you have a lower credit score, or even a high DTI, qualifying  for a FHA loan allows for the opportunity to purchase a home in, even with a sub-prime financial situation.

Regardless of the category you fall into, the best advice we have for you is to come speak with one of our agents. Every situation is unique, so speaking with someone directly will allow us to find the loan option that is best. For you!

 

 

By Natasha Mason

Millennials & Mortgages2020-09-28T15:14:21+00:00
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