The Down Payment
Historically, American home buyers put down 20 percent of a purchase price
and borrowed the other 80 percent. But the booming real estate values of the
1980s and 1990s required more flexible loans. In the 2000s, buyers make a
down payments of 10 percent, 5 percent, 3 percent—or even zero. But
all of these low down payment loan packages require good credit.
The low-down-payment loans also require Private Mortgage Insurance (PMI),
which is an insurance policy that protects the lender in case the borrower
defaults on the loan. Borrowers (not the lenders who benefit from PMI) usually
pay for the insurance as part of their mortgage payment each month.
One way to get around paying PMI and still avoid paying 20 percent down is
to get an 80-10-10 loan. This is a relatively new option that combines an
80 percent mortgage with a 10 percent home equity loan and a 10 percent down
payment. An 80-10-10 is useful not just for avoiding PMI; it also is used
many times to avoid getting a jumbo loan when you only put 10 percent down.
Whatever the amount you’re putting down, potential lenders may want
to see the money for the down payment in your bank account or someplace
else where it’s very liquid before they will fund the loan.
If your credit score is low—in the 500s—lenders may also want
to know that you have sufficient cash reserves to cover the cost of your mortgage,
plus taxes and homeowners insurance, for a number of months. The number of
months worth of reserves required will vary from lender to lender and based
on your score.
These reserves are often called PITI reserves. PITI stands for principal,
interest, taxes and insurance.
Next: Closing Costs |
