Home Down Payments for the Self-Employed: What You Need to Know.
Credit scores, pre-approvals requirements, mortgages, these are several factors self-employed homebuyers have to worry about to get a step closer to realizing their homeownership dream. But there’s always one equally important factor that everyone tends to overlook and that’s down payment. To settle one of the biggest upfront expenses, aspiring homebuyers are often also hurdled with the burden of coming up with enough cash for down payment. It’s a no-brainer that you have to be financially prepared if you’re to dabble into the real estate market but amid all the confusion, let’s find out everything we need to know about down payments.
First Thing’s First… Let’s Define What a Down Payment Is
In its general definition, it’s an initial payment (at a certain percentage of the total value) for high-cost assets such as homes or automobiles. According to the Houston Association of Realtors, when applying for a home loan, the down payment is a representation of your stake in the ownership of the property, your contribution for the purchase and the lender will be providing the rest of the finances to complete the purchase. With mortgages on a hot trail of diversifying over the last decade, one thing remains the same: lenders require some form of down payment in all mortgages.
Our real estate training program helps you learn more about the ins and outs of buying a home in Houston or anywhere in Texas through owner-financing. Our program lets you pick any home in the real estate market on a loanable without the usual paperwork processes and approvals. One of the primary requirements in this program is a 20% down payment (plus closing costs, depending on the property value) and like a bank-approved borrower, you’ll get a 30-year amortization period with an opportunity to refinance with a conventional lender without the pre-payment penalties. Here’s an MLS form to help you narrow down your budget, location, and property size options in and around the Houston area.
Here’s What You Need to Know About Down Payments
How Much Should You Be Putting Down on that Dream Home?
Well, the answer is that the amount of cash you allot for a down payment will help you and the lender answer two key questions:
- How Much Money You’ll be lent?
- What type of mortgage will suit you?
The tricky part about this is that paying too much could deplete your cash source or impact your financial health negatively in the long run. Paying too little, on the other hand, could cost you in fees and interest rates in the long run. To help you clear out all the confusion, these three steps can help you determine the amount needed for a down payment:
- Set a budget with enough reserves for maintenance, emergencies, and other costs
- Be smart, you can make a down payment without wrecking your savings and finances
- Search for an online free mortgage calculator to help you see a clear picture of how
In case you don’t know, the majority of aspiring homeowners can afford to loan a property up to 2.5 times their gross income. So, if your annual revenues sit around $100,000, you can afford a house that costs somewhere between $200,000-$250,000. This means that if you’re on the market for a home in the greater Houston area, that amount can land you a single-family home sitting on a spacious lot in a premier neighborhood or subdivision.
You’re wondering what do those calculations have to do with anything? Well, it’s a general guideline to give homebuyers a lay of the land (pun intended) about how much down you can put on your house.
Down Payments Play Influence Loan-to-Value Ratios (A Lot)
The loan-to-value ratio, or LTV, is the number used by lenders to determine borrower risks and mortgage prices. A larger down will lower your LTV costs (more on that below).
The basic formula for this is:
= Loan-to-Value Ratio
Property Fair Market Value
Having a lower LTV ratio means lower mortgage interest rates, fewer additional costs, and less risk to lenders because the aspiring homebuyer starts with more equity and a higher property stake. This means that lenders will see that the borrower will be less likely to fall behind on mortgage payments. If you’ve placed less than 20% of the home’s value as a down payment, homebuyers will receive higher interest rates to compensate for the lender’s heightened risk of granting the loan.
How Down Payments Benefit (or Harm) Homebuyers in the Long Run
Ever heard of the “phrase hard work pays off”? It’s the best analogy to help homebuyers visualize the merits of going for a larger down payment. At a glance, it may look, feel, and sound costly but it could lead to:
- More affordable mortgage rates
- Decreased up-front & ongoing fees
- Increased home equity from the get-go
Beyond that, lower down payments make borrowers a bigger risk for any lender and most will require borrowers who put down below 20% to shoulder private mortgage insurance as a safety net in case the borrower defaults.
As you already know with third-party owner financing, you can buy any single-family home of your choice. Below are some of the home listings in Houston that you might find interesting enough to browse. Get in touch with us if you want to buy a home with the help of a licensed Realtor.
Disclaimer: Shop Owner Finance/ TL Global is not a lender. We are a real estate training agency. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.