How do we judge those that put no money down? Do the sellers want to see more down? Do realtors get nervous when a buyer puts no money down? Tom Burris states, does that buyer get judged more than they should just based on their down payment?
So, when is the best time to put no money down on your purchase of a new home? Does this make you a bad borrower if you have no money down?
In all reality, there are so many ways to finance your new home. The first thing your loan officer should be doing is asking your goals. Asking you such questions as:
- How long do you plan on living in your house. (now, you can't tell the future, but some people know if they are going to live there for life or move in 2 to 3 years)
- How much do you want your payment to be..... and don't say free.
- How much money do you have to work with? This is the most interesting question of all. I'll be exploring your options based on this question and why.
Okay, so you tell me that you have $50,000 to work with. Common sense would say to put down at least $30,000. Using $25,000 for your down payment and $5,000 for your closing costs.
If you bought a house for $250,000 and mortgaged it for $225,000 at 6.5% for 30 years, your payment would be $1,422 a month just for PI. (principal & interest)
If you bought the same house and put no money down, financing the full amount of $250,000, at 6.75% for 30 years, your P & I payment would be $1,621 a month.
For arguments sake, that is a difference of $200 a month. And keep in mind, this is based on no points and if you have a good credit score of 660 or above. And now you tell yourself that you would be saving $2,400 a year. WOW. But is it wow....?
What to do with the extra money?
A good loan officer is going to have the knowledge and experience in regards to what types of programs are out there. They will ask about your goals as mentioned above, and essentially act as a financial planner in a certain sense. Not telling you were to place your money, but to give you options. Again,what can we do with this extra money?
- Talk to a financial planner. *** If you have a rate under 7%, you should be able to invest your money in medium to high risk stocks, that would give you a better return. You will also be writing more interest off because of the larger loan amount.
- By putting no money down, you could now take $25,000 to buy an investment property. Now you have rental income and another tax write off. And also building more equity.
- Money left over? You now have EMERGENCY money. You hear so many foreclosure stories (by Robert Ashby). Reasons why this might happen? Too many too list. But how about loss of job? Major medical bills? Now you have money to fall back on.
Conclusion : So many of us listen to our parents from the past. Meaning that it was told to you to pay off your house as soon as possible. Remember, back in the 70's and 80's rates ranged from 12% to 18%. Let your house work for you. Don't work for your house. Instead of putting a larger down payment, you can always put extra down on principal if you want to pay it down. But you have the flexibility of doing this, without having your money tied up in the house. If you ever needed this money back, the only way to get this money out is to refinance (cash-out), a home equity loan, or to sell the house.
Another major note : If in question about a buyer if they bring you a pre-qual that says no money down, don't hesitate to ask the loan officer several questions. If they are good enough, they should be able to set your mind at ease. And if they are able to supply a pre-approval letter, this is the best thing possible. Basically it should be in the form of a commitment letter. This means that an underwriter as already looked at the file and approved the loan.
Lastly, I mentioned financial planners. Sit down with your financial planner and or accountant for investing purposes and tax purposes. But a very good and creative loan officer should be able to guide you in the right direction.
UPDATE & a FYI : For those money geeks (Brian Brady, Bill A., and Robert Ashby) and those into stats, this is not to the penny. Meaning, I didn't talk about the PMI options and as Donna Harris mentioned....how long until you recoup your money and a few other things. This was just a generalization about those who believe buyers with no money are bad buyers or not positive buyers.
And Brian Brady has 2 different twists that fit into what I am trying to describe in this post : SHAKE YOUR ASS-ets baby!
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