I recently tried to displace the myth that real estate and mortgage professionals could determine what you can afford. See: How Much Can I Afford / A Stupid Question, for most of you what you can afford is going to be less, sometimes considerably less than you can qualify for.
Now that you've determined what payment you can comfortably afford, it's time to consider how much you should put down on your new home.
For most of the last forty years my next question would have been, "how much do you have?" That's still where we need to start, for we can't normally put down more than we have. We also need to determine where the money came from, can it be easily and timely replaced? We need to know where it came from because the lender will not accept "mattress money" for your down payment and closing cost. We need to know how soon you can replace it, because you need to retain liquidly (your own cash available to you).
Allot of professionals have been advocating higher down payments in the current mortgage crisis. Such bad advice could best be described as testosterone laced bovine droppings!
I can understand those that are selling you the house or the money. They are all to often ignorant and inexperienced. Then there are those who are anxiously willing to trade their integrity and your money for a quicker, surer commission. The inept and the immoral have always been with us. I group them tegether only because of the common desire for easer closings.
The other group, the one that disturbs me the most, is the knowledgeable guru that mistakenly advises that you need greater equity to protect you incase the value declines. Who are these pious prophets trying to protect? Certainly not the home owner!
Lets start with the idea that equity protects you incase the value plummets. It's true that you will lose money if the value should go down, that won't change weather we're talking about equity (cash) or your loan exceeds the value of the house. For any given scenario the gross amount of the loss is the same if the property goes down $30,000.00 from what you paid for it, it goes down $30,000.00!
If you had put an extra $30,000.00 down at the time of purchase who was protected? You've lost $30,000.00, but the bank still has equity (remember it was an extra $30,000.0 of your hard earned cash), that's it the bank was protected! You are protected from going "upside down" but is that desirable or false security?
Borrowing small amounts from your home equity is extremely expensive in the best case, if you've gone "upside down" it is nearly impossible and is certainly impractical! On the other hand, if you'd made a lesser down payment keeping you remaining cash in savings, all you have to do is ask for the cash you need! But, what about that "upside down" mortgage? What about it? The payment remains the same, probably allot less than you could rent a similar home for! When you make the 360 TH payment it's all your's just like you'd agreed to.
But, what if I loose my job, we could loose the house! Well lets look at the two possiblesituations, you made the large down payment, you can't make the monthly payments, if the bank foreclosures quickly they can recover all or most of their money, you've got 3 to 6 months to move to the street. If you'd keep your money in savings you've got several months cash available to let you look for a solution, if the bank forecloses they are going to lose money, they are going to be much more willing to work with you to avoid foreclosure. You might want to read: Risking Everything / Sharing The Risk
Who's protected by larger down payments?
So how much should you put down? How much have you got? Once you've determined what you have available and what is acceptable to the lender, you should determine what you need to keep in liquid reserve. Conventional wisdom says you should have 6 month income, your personal number could be higher or lower. Now you know what you can put down, remember closing cost.
So should you use it all? Not necessarily. Mortgage programs have certain thresholds once you've met one there is no additional savings until you reach the next. For conforming loans, Fannie Mae or Freddie Mac the numbers are; 3%, 5%, 10%, 15%, and 20% the rate and cost don't go down between 5% and 9.99% so if you can't reach the next level I recommend you keep your cash on hand. FHA cost the same weather you put 3% or 10% down, of course cost are applied to the loan amount.
So how much should you put down? As much as you can comfortably afford!
Your loan originator can and should tell you your afterlives, but only you the home buyer can determine what you are comfortable with. Assuming reasonable credit you can still get almost any request.
Now go buy a house!
Bill
William J Archambault Jr
The Real Estate Investment Institute
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