Lake Lanier Homes | Downpayments & Earnest Money

Real Estate Tools | Buying | Selling

Down Payments & Earnest Money
How much will you need for your initial monetary investment in your new home? It's a

combination of downpayment and closing costs, plus pre-paid items and reserves. Here's a rough estimate (depending on which type of mortgage you select) of funds required at closing:

Conventional = 10% of purchase price
FHA = 6% of purchase price
VA = 4.5% of purchase price

Sources for Your Downpayment
The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not-so-obvious sources. In recent years, for example, "parent power" has taken some new twists for first-time buyers; and older home owners are looking with great interest at "reverse equity mortgages."

Home Equity Loan. Parents often have considerable equity built up in their own homes -and many are tapping that asset through home equity loans to make a gift to the next generation. The 1981 federal tax law permits tax-free gifts from parents. Ask your tax advisor for current information on how large a gift may be without incurring income tax. Often lenders will require a "gift letter" to verify that parents don't expect repayment.

Shared Equity/Profit Sharing. In return for providing a part of the down payment, the parents (or another investor) share in the "profit" or net equity of the house when the home owners sell it.

Life Insurance. If you've built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often they will even ask a more favorable interest rate than would be asked for other types of loans.

Stocks and Bonds. If you feel the market doesn't favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.

Company Profit Sharing or Savings Plan (401-K, too). Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.

The larger the down payment, the less money you need to borrow, which means lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies and other miscellaneous items. So don't plan to put your last penny down at the closing table.

Figuring Your Housing Budget
Generally, lenders calculate that the home buyer shouldn't pay more than 28% of gross income for P.I.T.I. payments, or 36% for both P.I.T.I. and monthly debts combined. This might be a little less depending on other outstanding long-term debts (more than 8 months), alimony/child support payment, number of children and their ages, and other household budget items.

The easiest way to make a quick estimate of the mortgage amount for which you may qualify requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.

Lender Formulas
Most lenders will require that applicants meet both guidelines before approving a mortgage loan. The first formula compares income to housing costs without including long-term debts; the second includes all debts.

28% Formula
Total Monthly Housing Costs
(P.I.T.I.)
= 28% (or less)
Gross Monthly Income

36% Formula
P.I.T.I. + All Monthly Debts
= 36% (or less)
Gross Monthly Income

A variety of other formulas exist. VA and some lenders use a single ratio based on mortgage payment and all debts, which allows easier qualifying for a more expensive home for a borrower with a little debt.

To figure your housing budget, simply multiply your gross monthly income (before taxes) by 28% and 36%. For example, a family with a monthly income of $3,500 might qualify for a mortgage on a house that produces payments between $980 and $1,260

Shopping for Your Loan

Mortgage Bankers. Mortgage bankers issue mortgages to borrowers. They then process and sell the mortgages to large investors or into the secondary mortgage market.

Mortgage Loan Brokers. Some individuals or groups charge a fee (usually to the borrower) to match borrowers with lenders. Sometimes they make direct loans. An advantage of working with mortgage brokers is that they often represent many investors and lending institutions and can provide you with many more financing alternatives, usually at the same pride as the mortgage banker.

Financial Institutions. Mutual savings banks, savings and loan associations, insurance companies and some commercial banks are the traditional sources of mortgage loans. Savings and loans often grant favorable terms to their own account holders.

Private Lenders. Individuals (often home sellers) and groups (sometimes sellers employers, if the seller is being transferred) lend money. This source is especially helpful in arranging second mortgages, but can also assist with first trust, wrap-around and other mortgage plans.

Credit Unions. Federal Credit Unions can write 30-year conventional and government-insured mortgages. Some will make loans; others will not. A good possible source for credit union members.