A bigger down payment may equal lower rates

News about the subprime mortgage crisis continues its influence on the real estate market. Consequently, more stringent underwriting guidelines and standards have made an impact on buyers in general, especially those considering their first home purchase.

The interesting outcome of this trend is the affect on the size of down payments. In recent years, loan programs were made available that pushed the average loan-to-value ratio higher and higher. The loan to value ratio is simply a calculation of the value of the property versus the amount of the loan. As a result, a majority of foreclosures today were at or near 100 percent loan to value rather than the once standard 80 percent. Borrowers literally were not required to make down payments.

Now lenders are realizing that the larger the cash down payment, the lower the risk to the lender. A bigger down payment may now lead to lower rates and better terms overall. Assuming you have good credit, you can now expect to put down at least 5 percent for a down payment. And, if you want to avoid private mortgage insurance, which will increase monthly payments, you’ll need to put down 20 percent.

But what is an acceptable source of a down payment? Lenders look closely at the source of down payments. In basic terms, the money needs to be yours, not borrowed. So you have to be able to justify where it came from. Let’s look at the types of down payments that fit this description.

• Savings and checking accounts. Because these accounts indicate that you have been disciplined by setting aside some of your income rather than spending it, savings is the best source. Checking accounts are also easy to verify. It’s also a benefit to show an automatic deposit of your paycheck. Be prepared to provide documentation on at least three months worth of account statements.

• Brokerage and retirement accounts. As in savings and checking, brokerage accounts are easy to track as a source. Balances in retirement accounts such as 401(k) programs are acceptable for down payment funds. However, be careful about tapping into your retirement dollars. Some lenders consider borrowing from your 401(k) unacceptable and taking a distribution will have tax consequences. Best practice suggests you leave your retirement funds in for the long term and find another option for home purchase down payments.

• Other sources. Cash value of any whole life insurance policies, equity from other real estate or proceeds from the sale of another asset are also acceptable sources of down payments.

The zero down days are history. As the mortgage meltdown has spread, lenders are demanding better credit and proof of income. So a word to the wise: save your money before you make that big step into home ownership.

This column is provided by American Marine Bank. Contact the Kingston branch of American Marine Bank at (360) 297-1711. Contact American Marine Bank mortgage lending at (800) 648-3194.