Down Payment 101

When you start to think about buying a home, the number of terms you come across can be confusing. Not only do you have to consider the type of mortgage you’re going to opt for, but you also need to know about down payments.

This is a vital part of the process, because without your down payment in place, your buying process is not even going to get off the ground.

What is a Down Payment?

A down payment is the first part of the cost of the home which you pay as a lump sum when the purchase has been agreed. In order to be pre-approved for a mortgage, you need to prove that you have the right amount of down payment (more on that shortly) in the bank. This proves that you can afford the home, and gives the mortgage lender confidence that you are going to be able to make your mortgage repayments.

A down payment is 20% of the overall price of the property you’re looking to buy. If you have less than this, you may still be able to get a mortgage, but it becomes less likely, you will be offered worse rates, and you will also need to purchase insurance, which you’ll need to make repayments on over a long period of time. It is much more cost effective to save up the amount you need to hit the 20% mark.

Of course, if you can afford more than 20%, even better. This means you’ll have access to more properties, but it also means that your mortgage lender will offer you better rates, which could save you money every month on your repayment amount.

Down Payment Rules

Aside from having the right amount of money saved up for your down payment there is also another rule you have to adhere to. You will not be pre-approved for a mortgage if the down payment has been in your account untouched for less than 60 days. This is the full amount.

The reason is to stop people borrowing the cash for a few days and then withdrawing it and giving it back once the mortgage paperwork is in hand. Mortgage lenders want to know that you genuinely do have the money, because it proves affordability.

In order to stop your finances becoming confusing, it’s a good idea to keep your down payment in a separate account, one you generally don’t touch. You can show this after the 60 days are up, when you go to apply for a mortgage.

Your down payment will then be payable to the person you’re buying the property from, once the sale has been confirmed and paperwork is being exchanged. This will be handed over in one lump sum.

Buying a home for the first, second, or even third time can be confusing, but there is help at hand. Call Ramahi Real Estate Group today, for help, advice, and a range of properties which could include your new dream home.