Your First Step Toward Buying a Home
When you’re gearing up to buy a home, the first thing many potential buyers do is browse real estate ads in newspapers, magazines, and online listings. Some may even read how-to articles like this one. However, before you respond to an ad, contact a REALTOR®, or shop around for interest rates, you should first take a look at your savings.
Why is This Important?
Knowing how much money you have set aside for a down payment and closing costs is crucial because it influences nearly every aspect of the home-buying process. This includes how you structure your purchase offer, the types of loan programs you can qualify for, and the interest rates available to you.
Mortgage Programs
If you can only afford a minimum down payment, your loan program options will be limited. Similarly, if you’re receiving a gift for part or all of your down payment, your choices narrow. If you have enough for the down payment but need the lender or seller to cover some or all of your closing costs, this further restricts your options. Borrowing from your 401K or retirement plan for the down payment introduces additional rules that vary by loan program.
On the other hand, having a substantial down payment opens up a wide range of options for you. Available loan programs include conventional fixed-rate loans, adjustable-rate mortgages, buydowns, VA loans, FHA loans, graduated payment mortgages, and various combinations of these.
Shopping for Rates
Understanding your down payment is essential when shopping for interest rates. Some loan programs impose higher interest rates for minimal down payments, and the rates for different loan types can vary significantly. For instance, fixed-rate loans offered by conventional, VA, and FHA programs all come with different interest rates.
When contacting lenders by phone, a loan officer can help you identify suitable programs and provide accurate rate quotes. If you’re comparing rates online, you’ll need to have a basic understanding of your potential loan programs to make informed decisions.
Writing Your Offer
Your down payment amount also impacts how you write your purchase offer. Not only must you include down payment details in your offer, but different loan programs have unique requirements that influence the terms you propose. This is particularly important for FHA and VA loans.
If you plan to ask the seller to cover all or part of your closing costs, ensure that your loan program permits such a request. Generally, smaller down payments mean lenders allow the seller to pay less towards closing costs compared to larger down payments. Some programs restrict the types of costs a seller can cover.
Lastly, your down payment influences your loan qualification. Smaller down payments lead to stricter underwriting guidelines, whereas larger down payments may allow for more flexibility or exceptions.
Conclusion
As you can see, your down payment plays a pivotal role in every decision you make when buying a home. While it’s essential to browse ads, get familiar with neighborhoods, learn about pricing, and read extensively, your first actionable step should be determining how much money you have available for your purchase. This knowledge will guide you through the entire home-buying process, ensuring you make well-informed decisions.
