Friday, April 24, 2009

Down Payments For Dummies

Seriously. You’re not a dummy if you don’t understand the in’s and out’s of down payments. I didn’t either when I bought my first home. It was just a catchy title. And possibly a trademark infringement, but don’t tell the Patent and Trademark Office on me, ‘kay?

Here’s the skinny for all you first time buyer's out there thinking about taking advantage of today’s outstanding interest rates.

You must – absolutely must – have 3.5% of the purchase price in cash to be used as a down payment on Your Dream Home.

Buyers used to be able to use not for profit organizations like AmeriDream and Nehemiah Corp (and a couple thousand other groups) to help make the down payment for them. No more; the last Congress killed that. Start saving, and consider writing your Congressperson and ask him/her to back a bill that would allow this help again.

Savings account a little lean? You can make your down payment with money you received as a gift. The gift giver must be a family member though, so don’t go thinking about borrowing from Vito “No Neck” Bertolucci.

Also, you need some backup to prove it was a gift. Let’s say your Mom and Dad are gifting you some cash to buy your first place. They write you a check for $5,000. Make a copy of the check before you cash it, and make a copy of your bank statement showing exactly $5,000 being deposited.  Last, get Mom and Dad to sign a letter that says they’re giving you a gift for the purposes of buying a home and they don’t expect you to repay them.

Insider’s Tip: you can have a secret agreement to repay the money. Just don’t tell your lender. And don’t sign any repayment documents if Vito’s in the room. Alternately, I recommend offering Mom and Pop your first born child in lieu of repaying their gift. C’mon! They’re dying for grandkids, and you’re going to appreciate a good night’s sleep after you have kids.

That’s about the long and short getting hold of your down payment. Just a few parting words,

  • Your down payment will be divided into Earnest Money and Cash at Close. Earnest Money checks are cashed as soon as you're under contract, so click the link here to learn more. Cash at close is just what it sounds like: cash money that’s due on closing day.

  • The buyer chooses the amount of earnest money to put into the deal. I’ve seen $500 and I’ve seen the entire 3.5% used as earnest money. It’s up to you.

  • Bank owned properties are often the best deals out there. But be aware that banks are beginning to ask for more earnest money than many buyers are used to offering. Today I got a counter offer on a bank-owned property my buyer client bid on. The bank required 2.3% of the purchase price as earnest money.

Ready to browse properties online? Click on over to search the Phoenix area MLS.

Ready to look at homes in person? Hold on! Get a lender's approval first. One, a Loan Status Report (pre-approval for a mortgage) is required at the time you make an offer on a house. Two, it would really, really stink a lot to shop for homes in the $100,000 price range and later find out you're only qualified to spend $75,000. Trust me, you will be disappointed with what $75,000 buys if you first look at $100,000 homes.

Want advice just for your situation? Call or email us - (602-999-8831) or (623-570-9940)