Mortgage Calculator Can’t Create the Down Payment

Buying a first home or moving up and buying a second home are the dreams of many consumers.  These dreams have become slightly more difficult to achieve as the mortgage and credit markets have tightened.  As a result, tighter lending standards and requirements for larger down payments have now become the norm.  Even buying a starter home can now mean having to save thousands of dollars for a down payment. 

Running the mortgage calculators should be the first step to ascertain the down payment needed to purchase a new home.  The mortgage calculator, however, can not be used blindly for this task.  In order to understand what an acceptable down payment amount is, a consumer will need to know which loan programs are available and what the standard requirements are for these programs.  This task was much simpler when the no down payment loans were readily available to most all borrowers.  Those programs are but a faint memory now.  Therefore, a large part of the deployment of the mortgage calculator for down payment analysis is the understanding of what is a satisfactory down payment amount.

To determine the requirements for the various loan programs that are available it is very useful to read the guideline for mortgage basics and mortgage fundamentals.  Here, a consumer can see the difference between the 3% down payment requirements on FHA loans and the 5 to 20% down payment requirements for conventional home loans.  The mortgage basics will also cover the loan types regarding the terms and the monthly payments.  Down payments alone do not qualify a borrower for a home purchase.  Income, assets and credit will play a major role.  The mortgage calculator is a good tool to work with the numbers regarding an applicant’s debt levels and monthly income as well.  It would be nice if the mortgage lenders took a greater interest in the overall picture of their borrowers but the reality is that mortgages are approved and declined based on numbers.  The value of the mortgage calculators can be better understood with the realization that loan underwriting is all about number crunching not subjective analysis.  Since the mortgage calculators are there to help the mortgage applicant ascertain their qualifying status based on mortgage payments, mortgage terms, the mortgage rate and the borrower’s income and assets, the mortgage calculator turns out to be a great tool to get a leg up on the mortgage lenders underwriting process.

The most important lesson of the mortgage numbers game is that the numbers don’t lie.  If potential new home buyers are looking at a $175,000.00 home and plan on using and FHA loan with a 3.5% down payment, there has to be a minimum of $6,125.00 just to cover the down payment.  This amount can not be roughly $5,000.00; the requirement is similar to a law.  It is not a guideline.  $6,050.00 in liquid assets, just shy of the $6,125.00 needed in this example, will result in the loan process being held up until the mortgage lender verifies that the minimum requirement is met.  The mortgage loan down payment must be in the form of liquid assets and in the borrowers name or be an acceptable gift or grant.

There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities.  Many are open only to low- or moderate-income buyers and some are targeted to specific communities.  It’s always good to check because you may be surprised at income levels that qualify, especially if you live in a high-cost area.  Some programs lend buyers a substantial portion of the down payment.

In addition, most all mortgages require buyers who put down less than 20 percent to get private mortgage insurance, which can add $80 to $100 to your monthly bill.  And the less you put down, the higher your loan balance and therefore your monthly mortgage payment will be higher as well.  It is also important to note that as mortgage lenders have tightened their standards, there are incremental rate increases for down payments of less than 20% which also adds to a larger monthly mortgage payment.  Use the right mortgage rate in the mortgage payment calculator after calculating the down payment amount to avoid unnecessary payment surprises.

A consumers credit history will go a long way to determining the loan terms and mortgage rates you will be able to get.  This is also true of the down payment.  Borrowers who are not quite meeting the qualification requirements for a home loan because their credit history is less than perfect, will have a far better chance of being approved for the mortgage with a larger down payment.  The reverse of this statement is that a borrower with less than perfect credit will need a larger down payment to qualify for a home purchase.  Maintaining good credit and sprucing up already damaged credit is a key factor in mortgage loan approvals.  This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors.  Also consider paying down some debt, especially high-interest debt such as credit cards, which might flag you as a riskier borrower.  Check your debt ratios with the mortgage calculator to know exactly what the mortgage lender will be evaluating when they review your debt to income ratios.

To help save, what is probably a larger down payment in this new market, it may be wise idea to set up a separate account for savings of down payment funds.  This makes it harder to inadvertently spend these funds and makes the verification of the amount and the seasoning or history of savings very easy for the mortgage lender.  Avoiding the intermingling of these funds with other savings allows the future home buyer to easily keep track of how much they save and how much they may need to secure the right mortgage.

The mortgage calculator is an effective means to weigh the mortgage trade-offs of different loan programs with different down payment requirements, the varying interest rates and the impact they will have on loan qualifications.  Prequalify yourself with the help of the mortgage calculators and build a down payment savings that is comfortable for you with regards to the end loan amount and passes the number crunchers at the mortgage lender.

Tags: down payment, mortgage calculator, mortgage payment calculator, mortgage rate

This entry was posted on Monday, March 16th, 2009 at 3:23 pm and is filed under Mortgage Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.