First Things First: Before You Compare Mortgage Loans, Analyze Your Savings
What’s the first step in the home buying process?
Many potential owners will say it’s the determinination of what kind of home mortgage is best suited for your needs and goals. And, we agree, this is important.
But before you can get that far, you should take a close look at your savings. How come? Because the amount you can afford on a down payment has a trickle down effect. It will play a vital role in all the following areas of financing …
Mortgage Programs
If you only have enough available for a minimum down payment, your choices of loan programs will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited.
Also, if you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.
The point is simply this: the more you can pay up front, the more choices you’ll have when it comes to home loan options. You’ll be able to choose from such varied programs as conventional fixed-rate loans, adjustable-rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each.
Another reason you need to have at least some idea of your down payment is for the shopping and comparison of mortgage rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Moreover, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans.
However, the rates vary from one program to another.
You also need to have a clue about your down payment because it affects how you write your offer on a home purchase loan. Not only are you required to put your down payment information in the offer, but different loan programs have different rules which also affect how you write your offer. This is especially important when dealing with FHA and VA loans.
If you’re asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you’re asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.
Finally, your down payment also affects your ability to qualify for a home loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.