Paid by Rocket Mortgage
Say “down payment” to a house hunter and you will likely get a deer gaze in the headlights. After all, a down payment is a big deal, even for the most financially prepared potential buyer. That’s a significant amount of money to set aside – and it can be difficult to find the ârightâ amount of down payment to give while still having enough room for unexpected expenses, let alone furniture. In a competitive market, a down payment can also seem decisive when it comes to getting an offer accepted.
While it is true that a down payment is a factor that sellers consider when reviewing offers, it is not the only factor that determines whether or not your offer on a home is accepted. It is important that you feel comfortable with the down payment and that you are sure that the amount you deposit matches your overall financial situation. Here, the factors to be decided when determining a down payment.
Estimate how much down payment you can comfortably afford
You may have heard that you need to be prepared to deposit at least 20% on a house. While 20% is usually a good benchmark that saves you the hassle of purchasing private mortgage insurance (PMI), a low interest rate environment can mean that PMI rates can add several hundred dollars per month to your loan. global. Using a mortgage calculator can help you calculate numbers. In general, the more down payment you can afford (even if it’s not 20%), the lower your PMI can be. And when you have 20% or more equity in your home, your PMI can be canceled.
âIn general, it’s good to have a lead for planning a down payment,â says Eric Roberge, CFP, founder of Beyond Your Hammock, a financial planning firm, where he frequently works with professionals facing life transitions, including buying a house. . âYou don’t want your down payment decimating your savings. “
Roberge adds that in addition to your down payment, it’s a good idea to have 3 to 6 months of your salary in savings that can comfortably amortize closing costs and repairs, and that could be used to pay for the cost. mortgage in the event of loss of employment or change of income.
A calculator, such as Rocket Mortgage’s “How Much Home Price” calculator, can help you estimate roughly how much you might need to buy a home. It may require going back and forth with budgeting to move your down payment so you’re comfortable with that number on top of your savings, adds Roberge.
Know the pros and cons of tapping into other resources for the down payment
Some buyers have savings to cover a down payment. But others may consider other ways to raise funds.
âSome homeowners use their retirement savings to fund a down payment,â notes Leslie Tayne, financial lawyer and founder of Tayne Law Group, PC, who does not recommend this strategy. Not only will you have to pay income tax on the cash withdrawn, but “you are cheating your future by reducing the amount of money that accumulates and is made up each year for your retirement.” Tayne adds that the need to dip into retirement savings can also be an indicator that you are incurring a financial obligation that can be difficult to pay.
Other home buyers may tap gifts from family members to cover a down payment. If this is your case, you will probably need a gift letter for your lender. This is a document signed by you and the donors indicating that the money is a gift and not a loan. It may be a good idea to get this gift letter before your mortgage application, so you don’t have to search for documents while your mortgage application is being reviewed. It’s also good to make sure that you feel comfortable accepting the gift, and there are no conditions – express or implied – attached.
You may also be wondering if you qualify for low down payment mortgage programs, such as FHA, VA, or USDA.
What if you don’t have enough for a down payment?
A competitive market can make potential buyers want to stretch their budgets. But experts say waiting a year to get your finances in order can pay off. âThere are so many factors in buying a home, and you don’t want to focus on just one thing, like a low interest rate, and forget about your financial well-being,â says Roberge.
Committing to a savings plan for a down payment can be a valuable way to get the best financial situation possible before buying a home. One tactic if you are buying a house with a partner: live off one person’s income for a year, reducing your budget accordingly. But small budgeting steps can add up. Because a home is such an important purchase – potentially the most important in your life – taking your time, researching, and considering several scenarios can help you find the right home for your financial situation.
From Rocket Mortgage:
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