If you are thinking about purchasing your first home, the down payment may be one of the reasons why you decide to wait. While there are a number of factors that play into a pre-approval for a home loan, the down payment is a major component to this process. Setting aside funds for a home purchase is not always easy.
While there is a lot of information out there about homeownership, it is very important to talk with a local, knowledgeable lender regarding the options for your particular situation.
Myth #1: You need a 20% down payment.
This is certainly not the case in today’s real estate market. There are a number of no down payment options such as WHEDA (Wisconsin Housing Economic Development Authority) Loans or VA (Veteran Affairs) Loans to low down payment options for home buyers such as Federal Housing Administration (FHA) Loans and Conventional loans provided by Fannie Mae or Freddie Mac. Each of these loan programs offer long term 30 year fixed rate mortgages. Your loan program is determined by your earning capacity, where you are purchasing, the down payment and your credit score. Your lender will need to analyze your unique financial situation to determine which is the best fit for you.
Myth #2: Paying Private Mortgage Insurance (PMI) is smarter than having a larger down payment.
Some borrowers think that mortgage insurance seems like a small price to pay in order to save your money and keep it in the bank. Is this the right choice? It depends upon a number of factors including how long you plan in living in the house. Life changes can occur like accepting a new job in a different city or adding new members to the family and needing more space.
Private Mortgage Insurance is put in place if a borrower has less than 20% down payment. It is in essence a premium you pay until 20% is realized. The PMI is there in case the borrower were to default on the loan.
It may not seem like a big deal, however you’ll want to calculate what you’ll pay in the long run. Some loan programs, such as FHA financing, requires mortgage insurance for the life of the loan if you have less than 10% down initially. So, before you say, I do not want to pay for PMI, please compare your options.
Myth #3: Down payment assistance is easy to obtain.
Due to the Dodd-Frank Bill that was put into law, we now have to dot our I’s and cross out T’s more then ever. Factoring in down payment assistance adds to the process. If you do wish to obtain down payment assistance, talk to your realtor and let them know that some of the programs take up to 21-28 days to obtain approval. Knowing this ahead of time will keep the process smooth and does not create any surprises to both buyers and sellers. In order to be approved for down payment assistance, you need to be under certain income levels and debt to income requirements. If you think you want to go this route, please talk with your lender to see if they can help facilitate these loan assistance programs.
Myth #4: You can take out a loan for a down payment.
There is nothing wrong with getting a little help from an immediate family member or a relative for a down payment. The last couple of years I have seen this happen more often in the Dane County Real Estate Market. However, please note that the down payment needs to be a gift. In order to prove it’s a gift, a gift letter needs to be signed by the donor and the lender needs to see a copy of the gift transaction.
As mentioned, there are several different options a borrower can choose to buy a house. Each situation is different, which is why it is imperative to seek out local, highly skilled mortgage lenders in the marketplace. The State Bank of Cross Plains mortgage team is a dedicated, long tenured group of professionals who can help assist you in purchasing your first home. Please give us a call and set up an appointment with one of our mortgage professionals.