Mortgages and Down Payments

5 Things to Know About Mortgages and Down Payments

Most people dream of owning a home at some point. The major setback comes when you cannot afford to buy the house in cash, and you have to take a loan. Suppose you are considering taking a mortgage. Here are some things you need to keep in mind, so the process is straightforward.

Factors That Influence Your Loan Approval

Before you start applying for your loan, you need to figure out what will determine your loan getting approved. Knowing the requirements will help you make a choice. Here is what will significantly determine your loan approval:

  • Down payment
  • Credit score
  • Income

While figuring out your credit score and income is easy, many people do not look at how down payment affects their ability to get a loan and pay it back.

Down Payments

A down payment is the amount of money you will be required to put upfront when you apply for a loan. Most lenders require you to put down at least 8% to 20% of the house’s overall value. According to Spyglass Realty which specializes in Austin real estate, “some conventional loans (and loans not federally backed) allow borrowers with excellent credit to pay 0–3.5% down.”

Knowing your options will determine the percentage you pay as a down payment.

While you might be allowed by some lenders to pay less than 8% in down payment, it will affect many parts of the loans, which is something you need to keep in mind. Here are some things you need to think about regarding down payment and mortgages.

Down Payment Influences Your Monthly Repayment

While many lenders might not need you to pay more when handling your down payments, it will significantly influence the amount of money you end up paying after you get your loan. Since the down payment caters to a percentage of your house value, chances are the lower the down payment, the higher the monthly repayment. The reason behind this is that the timeline for paying your loan will not change, and you will still have to pay off the loan balance within whatever time limit has been set. If you have a higher balance, then you have to pay more.

Down Payment Builds Trust

Another thing you will notice with down payments is that it builds trust with the lenders. You can get the loan with a higher down payment without needing private mortgage insurance (PMI). Most lenders would ask you to get the PMI to secure their money if you had a lower down payment. It helps ensure you are sorted in case of any eventualities.

Down Payment and Loan-to-Value Ratio

Your down payment will determine your loan-to-value ratio – the higher your down payment, the lower your loan-to-value ratio. That means you get to pay lower interest on your loan if you have a higher down payment. Most lenders will look at your loan-to-value (LTV) and determine whether you are worth taking the risk or not. A higher LTV is viewed as a risk by most lenders.

Your Down Payment Determines Your Loan Offers

Whenever lenders look at your loan application, they will look at the amount you are willing to give as a down payment. If you cannot raise the 20% down payment, they might reject your loan application. Most lenders want to know that you are not at your wit’s end regarding the loan application. You should convince them that you can pay back the loan and even afford the home. However, you only need a little help with it. That way, the lenders will have a reason to trust you.

Larger Down Payments Have More Perks

Another thing you need to keep in mind is a larger down payment will lead to faster loan repayment. It is advisable to get a higher down payment percentage before approaching lenders. Your down payment can also determine the preapproval loan you get. You can determine your budget with a preapproved loan when looking for a home.

Buying a house on a mortgage is not as bad as many people make it out to be. All you need to do is ensure you look at the different factors that determine the kind of loan you get and how it will affect your repayment. By looking at the bigger picture, you get to decide whether you want to take the mortgage or take the time to plan yourself better.