Your Down Payment & LTV Affect Your Mortgage Payment

For most buyers, the down payment presents the biggest obstacle to homeownership, especially first-time buyers and those in lower income brackets. Fortunately for those people, lenders have become more willing to underwrite mortgages with small down payments.

Most mortgage lenders require a cash down payment of 5%-20% of the sale price. Some lenders have zero-down mortgage programs. If you can put down more than your lender requires (say, 25%-30%), your lender may be willing to overlook past credit blemishes, approve your loan without verifying your income, or both.

If you come up short on the down payment (less than 20% of the buy price), you may have to obtain private mortgage insurance (PMI) to protect the lender before your loan is approved. You can often lower your mortgage payment or afford a more expensive house by putting more money down.

The Lowdown on Down Payments

Say you make $40,000 a year. Your maximum comfortable monthly mortgage payment (28% of gross income) would be $933. Assuming your total monthly debt is no more than $1,200 (36% of gross income), the bigger the down payment, the more expensive the house you can buy.

For instance, say the monthly mortgage payment of $933 has an interest rate of 7.5%. In a 30-year fixed-rate mortgage, that monthly payment covers a total principal of $133,435.45. With 10% down, that mortgage would cover a house worth $148,262. With 20% down, the house price would be $166,794.

If you are selling a home, you can apply the equity as a down payment on the new house. Note: You need to include an estimate of closing costs in buying the property (plus selling costs if you're also selling a house). Closing costs are generally 3%-5% of the sale price.

Here are some tips to help you meet your down payment goals.

• Have your down payment ready at least 60 days before you apply for a mortgage loan.
• Start saving now and forego other expensive cash buys, such as a new car or vacation trip.
• Borrow your shortfall from the equity in your 401(k) retirement plan. You will be charged prime rate with possibly a small margin added on, but you'll meet your down payment goal and you can repay your retirement fund through your payroll deduction plan.
• Borrow from family or relatives and pay them back monthly. Lenders may require you and your family lender to sign a “gift letter” indicating that both parties consider this a gift before they will factor the amount into the loan.
• If you still come up short on the down payment, don't despair. There are special mortgages and first-time home buyer programs to help you buy your dream home.