A down payment for a home purchase is much more than a dollar amount or percentage of your dream home’s price.
In today’s tight mortgage money market, the down payment is best served up “seasoned,” money you extract from existing savings, investments, assets and other wealth acquired over time, not a hastily gathered slush fund.
After you put money down to buy a home, lenders want to see, not only that you have enough to pay the mortgage, but also that you retain sufficient assets or reserves to fall back on should you hit hard times.
“You have to have skin in the game. If you have a low down payment and there are other offers you may not get that house,” said Noni McVey, a real estate agent with Sotheby’s International Realty in Carmel.
The mortgage lender also wants to temper its risk by knowing you have the ability, after the home purchase, to pay property taxes, insurance, maintenance and other expenses that pop up during home ownership.
Bigger is better
“The down payment is very important with the conforming loan limits going down as they did in Monterey County to $482,000. On loans greater than $729,750, the conforming limit allowed the buyer to go in on a loan with as little as 3.5 percent down. Now, if you are above the conforming level, your down payment goes up considerably,” said Stuart Shankle, broker/owner of Shankle Real Estate in Monterey.
During the last boom cycle, highly leveraged home buys, made with nothing or little down, became a scourge of the housing market as home values crashed and homeowners found themselves “underwater” with a mortgage balance much greater than the value of their home.
A larger initial down payment could have bailed out many homeowners who now find themselves struggling to hold onto their equity-drained homes.
While low down payment loans are available, lenders prefer to write loans with larger down payments. The larger the down payment, the less risk for the lender.
If you can come up with 20 percent or more down, your loan won’t require mortgage insurance or a second mortgage to avoid mortgage insurance. Mortgage insurance protects the bank from you defaulting on the loan, but you have to foot the bill for the premiums.
“A larger down payment opens up the opportunity for better interest rates, you have better negotiating power and loans are not all one flavor, there are so many different programs. If you have a large down payment you have more programs to look at,” said McVey, also president-elect of the Monterey County Association of Realtors (MCAR).
Developing the savings habit
Saving a down payment that amounts to 20 percent of the cost of a home in Monterey County isn’t easy. A $200,000 home in Salinas would set you back $40,000. That’s about $1,100 a month for three years, half that amount for six years, not including any interest you’d earn.
You can, however develop some strategies that will pump up your savings and get you as close to 20 percent down as possible.
• Budget. Create a budget to reveals where every penny goes. If you don’t know where your money goes, you won’t know where you can cut back.
• Save routinely. Have money you’ve designated as savings regularly deducted from your payroll and deposited in a savings account with the highest rate of interest you can find. If it’s gone before you get it, you’ll be less likely to spend it.
Where to find savings
• Cut back. Some debts including rent, car payments and insurance premiums are fixed. Not so with groceries, clothing, gifts, gasoline and utilities. Once your budget is in place, you’ll discover numerous spending cuts. Starbucks. DVD rentals. Lottery tickets. Name brands. Texting.
• Dump credit. Save credit for emergencies only. Live within your means. Reduced credit card debt is money you can save.
• Adjust your W-4. Save that tax refund, but know that a tax refund is a free loan to the government. It costs you lost interest it could have earned in a savings account. Use the IRS’s online calculator to accurately adjust your W-4 to reflect your true tax liability.
• Get another job. Consider flipping burgers, working retail during the holidays, working at home or otherwise finding an additional source of income solely for the purpose of saving for the down payment.
• Organize. That’s right. Sell all that stuff you never use. Liquidate valuables that may not be a good fit for your new home. Clear the clutter. An organized home, with everything in its place, is a time-saving home and time is money.
“One can sit and discuss debt consolidation, paying off credit cards and saving money. Ultimately, the lender needs to take a look at each case and see what is being presented,” said Shankle.