subject: Real Estate Loans: Downpayments [print this page] When you buy a house you will get a loan from a bank to pay for it. Very few people, if any, pay cash for a home. When obtaining this mortgage, a percentage of the sale price is required up front as a down payment. The range is usually 3% up to 20% and beyond but occasionally no money down is offered.
No-money-down loans
The better your credit score is, the better chance you have of getting a zero down payment loan. This is usually 700 or higher. No money down home loans have increased significantly in the past few years. In 2007 they made up 20% of the mortgages in California. First time home buyers were much higher at 43%. This back fired on the part of the banks because these people were most at risk for defaulting on their mortgage and was the beginning of the huge mortgage crisis.
The mortgage industry took a dive because too many sub prime, or bad credit, mortgages were given out from 2000-2006 which resulted in much more foreclosures than average. Banks got smart though and sub prime borrowers will now struggle a bit more to find a lender.
It is not always smart to get a 0% down loan, even if you do quality. The first reason is basic because if you couldn't save for the down payment, either you don't have the financial discipline to save or you're not making enough money to pay back a loan of that size. A scary fact is that over half of all foreclosures occurred on zero down loans. You will also have higher monthly payments if you put no money down because your loan amount is required to be higher.
You will also have a much smaller window of options because you won't qualify for as much money without money down. These types of loans are also much harder to find than traditional loans which require a down payment of some sort. Another huge reason to put 20% down is because if you don't you'll be subjected to private mortgage insurance until 20% of the purchase price is paid. If you really want a 0% down loan go ahead but be sure you can afford it and it is the best option for your financial situation.
80/20 Loans
Usually if you find one of these 0% down loans, 100% of the purchase price is one loan. Sometimes the bank offers 80% of the price in one loan and 20% in another loan. This is because they typically put a higher interest rate on the lower one and make themselves more money. If you are given this option compare the amount you will pay for the duration of the loan to make your decision on what to do.
It is also advised not to borrow money from a relative for a down payment because that requires you taking on additional debt and the bank calculated your approval based on current debt, not excess. They want to be able to have your down payment if for some reason the house must be resold as well. You may be given money for a down payment from someone, which works for an FHA government loan but not for conventional. FHA loans are a bit stricter on standards though so some sellers may refuse them.
Another question some people ask is if they should make a down payment larger than 20%. The answer is yes if you can afford it. However, do not empty your savings accounts to do so because you still need a fund for a rainy day or home repairs that have the possibility to surface.
