When your real estate agent starts showing you homes one of the questions that should already have been covered is how much house you can afford. The best way to find out is to start by getting pre-approved for a loan. A rule of thumb is that your mortgage payment and taxes should not exceed a quarter of your take-home pay. Obviously, if you make more money you can afford a larger mortgage payment and a more expensive home. But even if you are not expecting an increase in pay there is a way to reduce your monthly mortgage payment and perhaps get into a more expensive and nicer home in a better neighborhood. That way is to build up your savings so that you can afford a larger down payment on your mortgage.
Why Is There A Down Payment?
Banks, Savings & Loans, and other lenders are in the business of lending money for profit. That means they want to make money and not lose anything. What scares the banker is the thought that he will loan you $100,000 for a home that he does not really want and you will default on your payments. Then he gets a house that he needs to sell, perhaps at a loss. The banker will refuse to lend you money or will do things to protect himself from loss. Aside from refusing to loan you money he may increase your interest rate, insist on more expensive mortgage insurance to cover his losses if you default and demand a larger down payment on your loan.
What Can You Do?
This issue can work in your favor if you are willing to increase the amount you pay for the down payment. First of all, you will have smaller payments on a smaller loan. Second, you should get a better interest rate if you increase your down payment. Third, the amount you pay for mortgage insurance should be less.
If you talk a lender who is not willing to cut you a better deal for a larger down payment, go and talk to someone else. Talk to your real estate agent about which lenders will likely be more interested in a person with more cash to put down on a house.
And an obvious result of paying a larger down payment is that you may be able to afford to get into your dream home even if it is a bit more expensive.
Are You Selling One Home And Buying Another?
It may be tempting when you are selling your current home to take some cash and not apply all of your current equity towards your new home. If you are trading up, the value of your current home works as a down payment on your new one. Ask your real estate agent for advice on this one. You may be increasing your interest rate, mortgage insurance rate and monthly payments to where the new home is more than you can afford.