How Big Does My Down Payment Need To Be?

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These days, not much. Ideally, you would have enough cash for a 20% down payment, closing costs equal to about 3% to 5% of the purchase price, and enough left over to cover two or three months of monthly housing expenses. That gives you a big chunk of equity in your house upfront and makes the lender happy — something that usually translates into a better deal. The trouble is, coming up with that much cash can be all but impossible for many first-time buyers. After all, we’re talking $40,000 on a $150,000 loan or $70,000 on a $250,000 mortgage.

The good news is that lenders over the last couple of years have become increasingly willing to finance as much as 95% or even 97% of a home. The reason: They can now unload the risk of such loans onto somebody else. To limit their exposure, many lenders regularly sell their loans to the Federal National Mortgage Association (Fannie Mae), which then bundles them into securities which are eventually sold to investors. It used to be that Fannie Mae only would buy loans for 80% financing. But it recently standardized the lending criteria for 97% financing and will now buy these loans, making lenders much more willing to provide them to you. It’s now common for first-time buyers to put down only 5%, or $7,500 on a $150,000 loan. While this sounds enticing, remember that puny down payments have their price. First of all, you start with very little equity in your home. Also, if you don’t have 20% to put down, you’ll probably have to ante up for mortgage insurance (which protects the bank against default and can top $1,000 a year if you put 5% down on a $200,000 loan).

If you are buying in an urban area or have low to moderate income, look into programs offered by your city or state that provide below-market loans with little or no down payment required. If you’re really cash-strapped, you can get 100% financing by “piggy-backing” a second loan equal to 20% of the purchase price on top of your 80% loan. But that 20% second mortgage will come at a much higher rate.

Article by SmartMoney.com

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