Determining How Much of a Down payment to place on a New Home

Bankers are salespeople. The product they sell is money. Many borrowers approach banking from an improper perspective. While the vision of sitting in front of a bankers desk, with the banker peering into your financial history may give you the feeling inferiority, you are actually in the position of power in these situations. Your credit history has an impact on how much power you have, but the banker is a salesperson who earns income from writing your loan. It is a highly competitive market and whether you understand this or not; the banker fully understands the situation.

If the banker is unfriendly or unprofessional, you have the option of speaking with the competitor next door. Banks earn far more income in loaning money than any other service they provide. They want to loan you money. If you fail to understand this fact of business, this banker can earn more profit from your loan and you will pay higher out-of-pocket costs than you should.

The key element that a banker analyzes is risk. Will the borrower be able to repay the loan? The higher the risk, the higher the profit. On the other hand, the lower the risk, the less profit the bank should earn, but this is not always the case. The better your credit history, the lower the loan-to-value ratio, the more leverage you hold in negotiating a low cost loan.

The amount of your down payment, the value of the asset you are seeking a loan for, and the amount of the loan, each contribute to risk. In evaluating the amount of down payment you should provide is a very complicated mix of loan types, monthly payment/income restrictions, your own long-term plans for the asset.

Conventional loans typically require a 10-20% down payment as compared to property value. If you have found a "steal" and the home appraises for $150,000 and your purchase price is only $100,000, you already have a 30% investment in this home. While most bankers require some money down, you may be surprised by how little down payment it will take to secure this loan.

If the home appraises near the selling price you may be able to secure an insured conventional loan for as little as 5-20% down.

If you only can afford a 5% or less down payment, you may qualify for an FHA or VA loan.

The down payment should reflect how much you can afford with your savings, but also how much you can afford with your monthly payment based on your income. Lenders use your income as a qualifier based on your ability to make monthly payments. In any case, you do not want to be "house poor" as my father always said.

While one of Thomas Jefferson's basic premises was that we should be able to own our own home, less than 1% of the US population own their own home. The other 99% either rent or the home in which they live is owned by the bank or mortgage company. Understanding this bitter reality should make you carefully consider your monthly mortgage payment. There is a 99% chance that you will never own your current home, but your quality of life should not suffer because all of your income is being directed towards your mortgage payment.

Calculating your Gross Income
	You	Spouse
1. Gross Salary (yr)
2. Bonuses (yr)
3. Interest Income (yr)
4. Dividend income (yr)
5. Social security/Pension (yr)
6. Child Support (yr)
7. Other income __________ (yr)
8. Total Lines 1-7
9. Total Both columns on line 8 Yearly Gross income
10. Monthly income (divide line 9 by 12 months

(Publisher note: Would you like to publish an article on this topic about Homes or other related topics? This article will be linked back to your own web site. Visit our Affiliate Publisher area to submit an article)

Calculating your Monthly Payments (debt)
	You	Spouse
1. Car payment
2. Student Loan
3. Credit card #1
4. Credit card #2
5. Credit card #3
6. Other Loan
7. Other income __________
8. Total Lines Add 1-7
9. Total Both columns on line 8 This is your monthly debt

For evaluating how much mortgage you will be able to finance, use the table below. Look in the left hand column and find your Gross Annual Income. The monthly payment column shows 25% of your Gross Annual income divided by 12 months. The top row shows various interest rates. Identify the current interest rate and find the loan amount where your gross annual income intersects the current interest rate. For example, if your current annual gross income is $20,000 and current interest rates are 8.5%, you should qualify for a mortgage of $54,189 with a principal and interest payment of $417 plus about 3% for taxes and insurance.

Now take you monthly income, subtract your monthly debt (above), and subtract this $417 payment and see how much "fun money" this leaves, after all, all work and no play makes Jane a dull girl, right?

You might want to figure in a little cushion for a higher utility bill, maintenance and upkeep, and decorating expenses.

Use this table to help you establish how much down payment you will need to buy the home of your dreams. This table helps you calculate your monthly gross income and how much you can afford in monthly mortgage payments.

In using this information and working backward, you can easily anticipate how much down payment will be necessary in order to buy the home of your dreams. Use caution and be conservative otherwise this dream could quickly become a nightmare.

[Up]

Helton Genealogical DNA Project - Hilton Family Tree - http://hiltonfamilytree.com

Website Design and

Optimization by

The Home Buyers Handbook

Helton Genealogical DNA Project - Hilton Family Tree - http://hiltonfamilytree.com