Calculating Your Down Payment

Once you have made the decision to step into the world of home ownership it’s time to figure out how to make that happen.  Your home is likely to be the biggest purchase you will ever make along with being your largest financial asset you need to get your finances in order before you start shopping for a mortgage.  You need to take a close look at your personal finances and assess what you need to do to make your dreams a reality.  Calculating your down payment that works for your financial situation will be your next step.

Your Income

The first thing you want to do is to talk either to your bank or a mortgage broker about your financial situation and what it would take to qualify for a mortgage.  There a number of different types of mortgages all with different requirements.  If you are looking at an investment property then be prepared to come up with at least 20% down.  However if you are looking at your primary residence then there are mortgage options that allow you to put down a much smaller down payment even as low as 3.5%.

Your Credit Score

Financial institutions use pretty specific guidelines in calculating how much of a mortgage you will qualify for.  One very large component of this is your credit score.  If your credit score isn’t quite as high as you like then you may want to improve it before you apply for a mortgage.  The better your credit score the better your interest rate will be.

Cash Available

Have you been saving for the down payment already?  It goes without saying that you can only put down what you have on hand, but you should do everything you can to maximize what you put down.

What Are You Comfortable With

Just because you qualify for a large mortgage doesn’t mean you should spend that amount. How much are you comfortable paying every month?  Avoid being house poor, where your mortgage payment is too high for you to save any money for emergencies.

Monthly Payments

The bigger your down payment the smaller your monthly payment and carrying charges will be.  Lower down payments are generally also tied to higher interest rates.  You should also discuss your mortgage options and whether a fixed rate or an adjustable rate mortgage.

A smart home buyer will consider what down payment make the most sense for their financial situation.  Go into this transaction with your eyes open and not wishful thinking.