The first thing you need to do if you want to buy a house is figure out how much of a down payment you can make. This may sound like something your dad would tell you, but there are a few good reasons why knowing how much you can put down and where you'll get the rest of the money can make all the difference when looking for a house and a mortgage to pay for it.
Before you pick up your local newspaper and look through the real estate section for a new house, call your banker, your accountant, or your spouse and find out how much you have in savings and liquid assets to make the down payment and pay the closing costs on your mortgage.
First, you need to think about where your down payment is coming from. This affects how much of the down payment your lender will actually count as yours when deciding if you qualify for a loan and what your rates and payments will be. If the money comes from your savings and investments, you should be able to show that. If you have employer retirement tax-deferred accounts, like 401(K), 403(b), etc., and want to use them to pay for the down payment, the lender will probably have a number of special rules about how those funds can be used. If all or part of your down payment comes from a gift, your lender will have a different set of rules that will change how much you have to pay each month. How you pay for closing costs will also affect your final rates and payments. The more you get from a third party, like the seller, the more risk the bank takes on.
As a general rule, the bigger your mortgage down payment, the better, at least from the point of view of programmes, rates, and payments. The more money you put down from your own savings, the less you have to pay each month and the more loan programmes you can choose from. One more benefit is that if you put more money down, any mistakes on your credit report or a low score will matter less and less. You will also need less income because your debt-to-income ratio will be better. By knowing how much you can put down, you'll know how much house your mortgage lender will let you buy. You'll also be able to get a mortgage pre-qualification letter and know what to put in your offer to buy with your realtor, lawyer, and the seller. By figuring out how much you can put down, you can get a head start on figuring out your overall budget for buying a home and your financing options. You'll also have time to take care of the paperwork, seasoning, and other time-sensitive things you need to do before closing your deal, which will save you weeks or even months of wasted time after you've found the house of your dreams.
So find out what you can put down and where you can get it, talk to a mortgage broker to find out what you can afford and what you can do with your down payment and paperwork to get the best rates, payments, and terms, and then take a pre-approval letter from the broker with you to start looking for homes with a full understanding of what you'll be asking for and writing on the contract.
