If you're thinking about buying your first home, that pesky down payment has probably kept you awake more than a few nights. We get it—while a pre-approval is crucial for determining your buying power, it's the down payment that shows you mean business.
But saving up is hard. In a study conducted by NerdWallet, 44% of respondents said a lack of a down payment was the roadblock keeping them from buying a home.
Myth No. 1: You need 20% down
In the NerdWallet study, 44% of respondents also believed you need 20% (or more) down to buy a home. For decades, this was standard, but it isn’t always the case anymore.
Myth No. 2: Paying mortgage insurance is smarter than paying a bigger down payment
Perhaps that mortgage insurance seems like a small price to pay in order not to deplete your bank account and win the house. So what if you make some additional payments for a while?
It might not be a big deal, but you’ll want to calculate what you'll pay in the long run. Take, for example, conventional loans. If you put less than 20% down, you'll get stuck with PMI, but only until the principal balance reaches 78% or less of the original purchase price.
Myth No. 3: Cash is king
There is some truth to this belief. Cash offers offer one big benefit to a seller: They're guaranteed to close on time with no loan approval hiccups.
But on the flip side,“That myth assumes that sellers care most about a fast and certain close, and that’s not always true,” says Casey Fleming, mortgage adviser and author of "The Loan Guide: How to Get the Best Possible Mortgage."
Often, if you make the bigger offer, or you write a killer personal letter that resonates with the seller, you stand a better chance of getting approved over an all-cash offer.
Myth No. 4: Down payment assistance is easy!
We hate to burst your bubble—or discourage you from trying to get down payment assistance if you qualify—but finding, applying, and getting approved for help isn’t always easy.
First, there are no national, or even many state-run, assistance programs.
“Pretty much every program is locally run, sometimes by county or even by city,” Fleming says. You can check the Department of Housing and Urban Development's website for a smattering of state-run "homeowner assistance" options, but you'll have to do some digging.
Talk to your REALTOR® to see what they can do to help you with this process.
Myth No. 5: You shouldn't put more than 20% down
Let's say you're lucky enough to have saved more than 20% down. Odds are good some well-meaning friend is going to tell you to put only 20% down—no more, no less. After all, now that you've successfully avoided PMI, why fork over more cash than you have to?
A couple of reasons, Fleming says: First, a higher down payment could signal to your lender that you're a trustworthy borrower and get you a lower interest rate on your mortgage. Plus, the more you pay upfront, the less you're borrowing—which means lower mortgage payments.
But you'll have to put down at least 5% more to see that difference, according to Fleming.
Myth No. 6: You can take out a loan for a down payment
Truth: There's nothing wrong with getting help with your down payment, but it has to be a gift. If a lender suspects the money might be a loan, repaying said loan will be factored into your mortgage approval amount and you’ll qualify for less than you might have wanted.
In order to prove it's a gift, you’ll have to get a letter from the gifters, swearing that they don’t plan on asking for the money back. And don't try to game the system—lying on a mortgage application is a felony.
Get the full article here.