How to Determine How Much You Need for a Down Payment for a House

Buying property is a big step in life and for many it’s probably the biggest step and investment they’ll ever make. The financial reward and strain can make or break someone’s life if the purchase of your home isn’t timed right. This is what happened to many families in the US during the Subprime crisis, people that should not have bought houses bought houses, and some of those houses were completely out of their means.

Be Smart & Be Reasonable
Houses are expensive items that can cost hundreds of thousands to millions of dollars and you have to understand what you can afford before you jump in. You have to consider your current savings, income, and debt. Your credit rating will also come in to play to see if you can get a loan at all or what interest rate the financial institution will lend you money at.

Here’s a good calculator to start off with: http://www.mortgage.com/home_buying/mortgage_calculators/default.aspx?id=2

A $400,000 home
Say that you decide on buying a $400,000 home and you think you can afford it. But it really boils down to how much of a down payment can you afford? I’m from Canada, and here there really aren’t any tax breaks for the interest we pay on our own homes. Of course, if we were ever to sell our homes in the future, at least a year and a half from now, and realize a capital gain, we won’t have to pay taxes under the Principal Residence Tax Exemption. Every country is different and you might want to discuss this with your local bank or accountant.

The 25% Rule
Some financial institutions used to offer (and I’m sure some still do) 0% down mortgages. A 0% down mortgage usually has a higher mortgage interest rate and usually requires a purchase of insurance on the mortgage itself because of the risk that is involved. Usually a 0% mortgage is a one-way ticket to financial doom. I think a 25% down payment is safe and yet strong. You have shown your commitment to save money, (in the case of a $400,0000 home, it’s $100,000 down payment) and showing the financial institution that will hopefully lend you money that they will be making a safer investment in you. That’s in comparison to someone that has a 0, 5, or 15% down payment.

Total Debt Service Ratio
Many financial institutions use the Total Debt Service Ratio when they are determining whether they should lend money to you. Read an article I previously wrote to find out more about the Total Debt Service Ratio. The TDS, as it also know, calculates your Monthly mortgage/rent + Property Taxes + Heating + 50% of Condo Fees + Debt Payments divided by your Monthly Gross Family Income. Ideally your TDS should under 40%.

Mo2 Thinks Ideally you want to be paying cash for your home, but obviously that isn’t possible for most of us. If that isn’t possible, then the least you should do is strive to reach the 25% point, if that’s too much then you should consider buying a cheaper home. You should never be stretching yourself too far when buying a home because you’re putting greater risk on yourself. You have to understand that there are other fees that will come with a home such as maintenance, moving in fees, legal fees, and the list goes on. Making home purchases is a big decision and you should consult as many experts as you can before you jump in and buy the house. It’s more than just a number you will actually be living there for some time, if not the rest of your life! So be sure to think it through and get the best advice you can before you buy. A real estate agent can be helpful but don’t forget that at the end of the day, they just want to sell the house, get the commission and move on. Thanks for reading again, please feel free to leave comments!