Saving for the Down Payment
Saving for a down payment is part of an overall program to get your finances in order prior to shopping for a home. This includes rounding up financial records, examining your spending habits, and setting a budget you can live with. An allowance for closing costs should also be included in your saving's budget.
How much is required?
The down payment is usually expressed as a percentage of the overall purchase price of the home, and varies depending on the lender, type of financing and amount financed. In recent years, lenders have been willing to offer conventional financing with as little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the Federal Housing Administration (FHA), also require minimal down payments.
Private mortgage insurance
Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry private mortgage insurance (PMI). This insurance protects the lender in case of loan default, and usually involves an up-front payment at closing, as well as a monthly premium. Once you have paid off 20% of the loan, you can request the policy be canceled. Some lenders cancel automatically, while others require a written request.
Many lenders allow use of gift funds for the down payment and closing costs. The gift may come from family, friends or other sources, but lenders usually require a "gift letter" stating the gift doesn't have to be repaid. Some lenders will also require you to pay at least a portion of the down payment from your own funds. If you plan to use gift money to purchase a home, ask your lender about their policies regarding gifts.
Buyers are usually required to deposit earnest money with the seller when they make an offer. If the offer is accepted, the earnest money is then credited towards the down payment. The amount varies widely depending on the seller and local custom, but be prepared from the outset to have funds earmarked for this purpose.
Don't forget closing costs
In addition to the down payment, you will also need to save for additional loan fees (closing costs). These cost cover items such as title insurance, documentary stamps, loan origination fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs.
Some buyers are surprised by the amount of the closing costs, which can easily be thousands of dollars. Closing costs can be negotiated with the seller however. You may agree to pay the full asking price in exchange for the seller paying all allowable closing costs.
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