Looking to buy a new home, but not sure how your debt factors into the equation? Here are some suggestions to help you decipher how best to move forward.
Before you make a decision, assess your current financial standing. This is universally good advice when you go to make any major purchase. If you have outstanding debt that needs to be remedied, this may not necessarily be a hurdle to home ownership, but it can make the qualification process or saving money for a down payment more difficult. Before you make any decisions, a comprehensive inventory of your current financial standing is advisable. You can work towards saving for a down payment, while simultaneously making payments on debt. It may seem a daunting task initially, but getting organized with a strict budget can help you do both. A minimal amount of change today, may equate to a hefty savings down the road.
In order to determine the best route moving forward, let’s define what exactly a down payment is. A down payment is a portion of the total sales price of your home. The payment is added to your transaction to reduce the amount you need to finance and will help determine how much home you can comfortably afford. Like most payment requirements, the higher the numerical value of your down payment, the better equipped you will be in the eyes of the lender. You should be aware that most down payment figures are discussed and calculated using percentages.
While a down payment is not always necessary, they are the standard in many home ownership transactions. While in some circumstances you won’t need a down payment to purchase a property, they often serve to help alleviate the amount you need to borrow. It should be noted that most mortgage lenders will require a down payment regardless of the sale. A down payment indicates to lenders that you are serious about your purchase. It shows interest, and often is a signal to lenders that you are less of a risk for them to finance.
Where does money from a down payment come from? There are a few places where you can gather money for a down payment. If you already have a home that you’re selling, this is historically the most lucrative asset you have. Many people will take money from the sale of their home and funnel it directly into a new purchase. With that said, saving a decent chunk of change from a sale will prove beneficial down the line. Some people will dip into their savings in order to finance a down payment. Be cautious of doing so. If you’re going to use your savings to cover a down payment, be practical in what you take out. Savings are often a fail-safe for people in case of emergency. Nevertheless, once you get organized, you can help map out how exactly you wish to save your money. No matter what you do, just make sure you’re aware of where your savings stand.
Down payments also help determine how much you can borrow. Down payments allow lenders insight into your financial standing. Most experts would agree that a down payment is reflective of healthy financial standing, and shows that you are prepared for homeownership. Even the process of being able to save and accumulate money is often very telling of a buyer’s discipline. Down payments can also help protect buyers from negative equity should the market suffer a downturn. The more you are able to invest down payment wise, the better your opportunity to see sizeable returns.
Without a down payment, things can get tricky, but there are other avenues worth exploring. Fortunately, certain populations may be eligible for loans and assistance. If you or your spouse has served in the military you may qualify for a Veterans Affairs Loan, which requires 0% down, and unlike other loans, requires no mortgage insurance. The Department of Veteran Affairs will insure the loan on your behalf. However, be mindful that there are certain requirements you must have met, and these include 90 consecutive days of active war time duty, or 181 days during peacetime. You can discuss the criteria even further with your loan officer. For those not military affiliated, the Federal Housing Administration only requires a down payment of 3.5%, as opposed to the industry standard 20%. However, in order to be granted an FHA loan, you will still need to maintain a decent credit score. Scores as low as 500 may qualify. Although, if your score errs on the lower side, you may be required to put down more than the standard 3.5%. States also have programs available, if you’d rather curtail the federal approach. There are more than 2,000+ payment programs nationally that offer financial assistance. Be mindful that while most of these programs give you breaks on down payment percentages, there are still stipulations to be wary of. Essentially, if you forgo a down payment, you could still end up paying through other avenues.
A little bit of debt is not necessarily a road block. Many reputable lenders will still be willing to work with you, and explore alternatives, particularly if they see strides being made to settle your debt. However, most lenders will advise you to think critically about moving forward with a purchase if they see a large amount of outstanding debt. In circumstances like this, it’s probably best to settle any major debt, or procure a payment plan to ensure you are actively working toward becoming debt free. This will help alleviate major stress that often comes with the home buying process.
Not sure where to start? Have a conversation with your lender. Lenders are far more knowledgeable about the payment process than anyone else, and can advise their clientele on a case by case basis. If you are on the fence about what to do, seek out advice from a seasoned loan officer. They will be able to piece together your specific financial history and circumstances in order to give you the best advice moving forward. Don’t be afraid to reach out and ask questions if you’re struggling to come up with a long-term plan that makes sense for you. Remember that everyone’s circumstances are different, and you may be eligible for certain assistance programs.
In a nutshell, if you are able to provide a down payment, you are in an optimal financial position for homeownership. More down payment means more house, better financing opportunities, and peace of mind for both you and your lender.