Real Estate Market

How your down payment adds up

(12/3/2010) ERATE Exclusive - A down payment on a home purchase is much more than a sack of cash.

It's more than a percentage of the home price.

In today's economy, your down payment must be "seasoned" money, an amount you extract from existing savings, investments, assets and other wealth acquired over time.

Lenders want to see, not only that you have enough to pay the mortgage, but also sufficient assets or reserves to fall back on should you hit hard times.

The lender needs to temper its risk with the knowledge that you have both the income and cash after the home purchase to pay property taxes, insurance, maintenance and other periodic expenses that come with buying a home.

Lenders want to see your down payment as part of a holistic, goal-oriented, financial planning strategy developed as a frugal approach to homeownership. It's the same financial strategy you use for retirement, sending the kids to school, starting your own business and other financial goals.

More is better

Sound financial planning also gives you the opportunity of time, time to gather as much as possible for a sizable stake in the home you buy.

During the last boom-bust cycle, highly leveraged home buys, made with nothing or little down, became the scourge of the housing market.

A larger initial down payment could have bailed out many homeowners who now find themselves struggling to hold onto their equity-drained homes.

While low down payment loans remain available, lenders prefer to write loans with larger down payments. The larger the down payment, the less risk for the lender.

Money on the table means you are willing to share the risk rather than leverage the deal with the hope that appreciation will subsidize your lack of financial planning.

When you take a larger initial stake in the home, lenders know you will be less likely to walk away from the home should you get into a tight financial spot.

Also, the larger your down payment the greater chance you'll actually be approved for the loan at a cheaper interest rate.

When you put 20 percent or more down, your loan won't require mortgage insurance or a second mortgage to avoid mortgage insurance.

Where you can extract savings

Granted, saving for a down payment that amounts to 20 percent of the cost of a home in high-cost areas is tough, but there are some strategies you can consider to start accumulating cash for your home buying cause.

• Budget. Create a budget to determine where every penny goes. If you don't know where your money goes, you won't know where you can cut back.

• Save routinely. Have savings deducted from your income deposited in a savings or investment account with the highest rate of interest you can find. If it's gone before you get it, you'll be less likely to spend it. Consider Federal Deposit Insurance Corporation (FDIC) insured certificates of deposit (CDs), money market funds, and other low- to no-risk savings or investment vehicles.

• Cut back. Some debts including rent, car payments and insurance premiums are fixed. Cut back wherever possible on groceries, clothing, gifts, gasoline and utilities. The savings can be substantial.

• Dump credit. Save credit for emergencies. Reducing credit debt gives you money to save and it can boost your credit score.

• Adjust your W-4. A tax refund is a free loan to the government. It costs you lost interest you could have earned in a savings account. Adjust your W-4 accurately to reflect your true tax liability. offers a handy calculator to learn how much in taxes you should have withheld from your income.

• Liquidate assets. Unload stamp, coin, baseball card, comic book collections and what is collecting dust in your safety deposit box.

• Get a job. If you are already squeezed, consider becoming holiday help, flip burgers, work at home or otherwise find another source of income to add cash to your down payment stash.

• Organize.E-bay all that stuff you never use. Can the clutter. An organized home, with everything in its place, is a time-saving home and time is money.

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