One of the requirements of buying a home is for the buyer to provide a down payment equal to somewhere between 3 and 20% of the price of the home being purchased. The reasons behind a down payment may have seemed a bit arbitrary up to this point. Home buyers know they need a down payment, but just how important a down payment is can often be overlooked. Once it’s all explained here, it will make a ton of sense to all first-time home buyers.

Why Is A Down Payment Important?

The larger the amount of the down payment that you can provide, the better it will be for your home loan status. The amount of the down payment provided will affect the type of loan that you get the and amount of the loan that you get for the house you buy.

For any down payment that is less than 20% of the purchase price of the home, you’ll need to get PMI (private mortgage insurance). A smaller down payment may also mean that less of the closing costs will be covered up front. This is definitely something to look into because long term, it may not be a wise decision financially. Think of the down payment as the foundation of the biggest purchase you’ll ever make.

Check Your Finances

If you’re not able to save up for a down payment, it may not be the best time for you to buy a house. The mortgage process makes you take a step back and really check out your finances. Buying a home is a huge financial commitment. If you’re unable to save properly for a down payment, you may not be ready to commit to buying a home.

If you haven’t been able to save up enough for a down payment, you may not be financially ready to buy a home. It’s a great way to take a look at your financial health when you’re thinking about acquiring a mortgage. A small down payment means that you’re eligible for fewer types of mortgages. Typically a down payment of 5% or less limits you to only a few different kinds of mortgages. This is important to keep in mind when planing your financial future. Also, keep in mind that the larger the down payment, the more keen lenders will be on actually granting you a loan.

Renting Could Help You In The Long Term

The thought of continuing to a rent over buy a home could be stressful for you. In the long term, however, it’s much better to continue paying rent than to risk losing your home due to foreclosure. Being unable to make mortgage payments is a serious thing. The entire process of buying a home starts in acquiring for the down payment.

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Mortgage rates are at historic lows and there is no better time to buy a home. Do you qualify for those low advertised rates? Will you be able to secure a mortgage? Studies show that 6 in 10 people do qualify for mortgage loans. For those that can’t qualify here are ten reasons why a would-be borrower might face rejection:

1. A low credit score will keep you from getting a mortgage. Typically, a score less than 620 is unacceptable by most lender standards.

2. A maxed out credit card threshold will stop a mortgage in its tracks. If your balance more than 30 percent of the allowable credit lenders will take pause.

3. Multiple credit inquiries may drop your credit score. Limit your credit inquiries to mortgage-only credit pulls within a 30-day period.

4. Did you Co-sign a loan with someone? If so, plan to provide 12 months of canceled checks showing they make the payments to the creditor.

5. Other housing liability payments or a consumer loan for a vehicle may prevent your loan approval. Lenders are looking for you to have double the income to offset each dollar of debt you carry.

6. If you are self-employed you may not be showing income under a Schedule C. This reduces your borrowing power.

7. Claiming many unreimbursed business expenses and losses on your taxes may help you pay less taxes but it also can reduce your borrowing power.

8. If you change jobs often this could also hurt your chances at a mortgage. If you occupational status has changed in the past two years it can hurt you.

9. If you are planning on using cash for your purchase think again. All monies must come from some kind of a bank account.

10. Don’t plan on transferring money from different accounts during the loan process. Be prepared to show full bank statements and a chain of deposits etc.

Your mortgage professional should be able to look at your credit, debt, income and assets and make a determination of whether you qualify for a mortgage.

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