(Vocus/PRWEB) February 15, 2011
A critical part of getting ready to buy a home is preparing to make the down payment, the portion of the home's sales price that is paid upfront as part of the closing process. Lenders often look at the down payment amount as the buyer’s investment in the home, and thus it plays an important role in how lenders determine financing eligibility, interest rates and terms.
“Historically, down payments have ranged from five to 20 percent of the purchase price of a home, said Matt Vernon, national retail sales executive at Bank of America. “However, the actual amount depends on many factors, including the type of mortgage, the lender and the borrower’s credit history.”
There are government-backed loan programs available to help borrowers who need more flexible down payment, income or credit requirements in order to qualify. The Federal Housing Administration (FHA) offers loan programs with lower down payment requirements, compared to most conventional loans.
U.S. military veterans may qualify for a loan from the Department of Veterans Affairs (VA), which provides home loan guarantees. Among other benefits, no down payment is required with a VA loan. However, potential borrowers should know that private mortgage insurance may be required, at an additional cost, if the down payment is less than 20 percent.
Some loan products and programs allow for an equity gift, a friend or relative’s financial contribution to a homebuyer’s down payment. An equity gift is not a loan and must be accompanied by a “gift letter,” which confirms the funds will not be repaid.
Saving for a down payment can seem daunting, but creating a savings plan and sticking to it will set aspiring buyers on the path to homeownership. Here are some tips to help meet the savings goals:
- Estimate a possible down payment. Borrowers can use a down payment calculator, like the one offered by Bank of America, to determine a potential down payment based on an estimated purchase budget, the property’s location and preferred loan terms.
- Minimize monthly expenses. Putting away money for a future down payment will inevitably require sacrifices in other areas. Make an effort to free up cash by paying down auto loans and credit cards before beginning a savings routine.
- "Try on" a monthly mortgage payment. Using a monthly mortgage payment calculator, estimate a projected payment (including mortgage principal, interest, taxes, insurance and additional fees such as homeowner’s association dues). Subtract what you are currently paying in rent from this amount and put the difference in a savings account every month. This not only helps you save, it gives you a realistic experience of the financial commitment required to own a home.
- Create a down payment savings account. Stashing money away in a separate account will help keep potential borrowers from tapping into down payment funds for unrelated expenses. Choosing higher interest savings accounts like money market accounts or CDs may offer higher interest rates, which can help funds grow more quickly.
- Make automatic contributions. Once a monthly savings amount is set, having that amount deducted from payroll or other income sources and automatically deposited into a savings account, which removes the temptation to use that money for other things.
For more information on down payments as well as tips and tools on the home buying process, visit Bank of America’s interactive online home loan guide at http://myhome.bankofamerica.com.