Cash
Cash is a very interesting topic when discussing home mortgages. No money down programs are very common today. Usually, at 600 scores and higher you begin to have the option to buy a house with almost no out of pocket expenses.
There are different ways to do this. Some programs allow 100% Loan to Value, LTV. Other programs do the same thing, but use an 80% first mortgage with a 20% second mortgage. Still other programs are set up to offer you 103% of the purchase price.
You might ask yourself why you would need more than 100% LTV? The answer is closing costs. We'll go more in depth on closing costs in another section. For now, remember that your closing costs are in addition to your downpayment and reserves.
Cash becomes more important as you go down the credit scale. Simply put, the more money you bring to the table, the more comfortable a lender feels giving you a loan.
Their reasoning is twofold. The more money you have invested in a home, the less apt you are to walk away if something goes wrong. And, the more money you put down means less money they have to lend you. The higher percentage you have invested, the lower they have invested. If the lender does have to foreclose, the house can be sold quickly to help recover the lender's loss.
If you have less than perfect credit, cash becomes your best bargaining tool. Your amount of cash downpayment can be a compensating factor to offset a lack in credit or employment. Seasoned money, which means trackable for 60 days or more with a paper trail, is the best type of downpayment. Unseasoned funds and gift funds can still be used in some cases. However, having seasoned money makes your position stronger.
How Much is Enough?
This answer varies in each situation. However, there are some basic guidelines. The bare minimum is 3-5% of the purchase price plus closing costs. A 10% downpayment is much better. Higher percentages, such as 15% and 20% are necessary with certain credit and employment situations. A 20% downpayment can compensate for a lot of credit and employment issues.
The amount of money you put down influences your approval, your interest rate and whether or not you pay PMI, or private mortgage insurance. PMI applies to any loan over 80% of the purchase price. PMI is basically insurance for the lender. If the lender has to foreclose, PMI pays them for the amount over 80% which then allows the lender to sell the property cheaper and not take a big loss.
There are loan programs that do not require you to pay PMI on loans over 80% LTV. You will find that these loans generally have higher interest rates. Your higher rate and therefore higher payment allows the lender to pay your PMI for you. Get advice from a smart broker here. There are cases where this is a better choice for you.
