The Loan Application: Down Payment
Your down payment demonstrates your ability to save and manage money, and also gives you some "skin in the game" when you buy a house. For lenders, both these factors suggest that you're less likely to default on a loan, or ultimately go into foreclosure.
The industry standard for a down payment is 20% of the home's purchase price. However, there are many loan products available for people with less than 20% to put down. An FHA loan is a good example of a government-backed mortgage that requires only a 3.5% down payment.
Your loan officer will want to know how much you've saved, as this will affect your mortgage options. You'll usually qualify for a better overall interest rate if you have a larger down payment, which means you'll spend less money over the lifetime of your loan. Also, loans with less than a 20% down payment usually require mortgage insurance -- an extra monthly payment that will add to the cost of owning a home.
Tip!
Lenders want to see that you have at least two months worth of reserve funds saved up in addition to your down payment; if you lose your job or fall into some other hardship, you'll be able to cover mortgage payments until you're back on your feet. If you have damaged credit or gaps in your work history, your lender may want more of a buffer -- possibly up to six months worth.
Stocks. Bonds. CDs. Retirement accounts. All of these things are considered assets -- if sold, they can generate money that can be spent to cover expenses. Even if you're not planning to sell any of these assets to buy your home, your mortgage officer will want to review them.
Why? In the event that something goes wrong -- you lose your job, for instance -- these assets may make the difference between making your mortgage payments, or being forced to default on your loan.