Larger down payment prompts lender, seller largess

by Broderick Perkins

(3/11/2013) - Sure you can buy a home with a low-down, government-backed loan, but you won't get the benefits you get when your down payment is 20 percent or more.

Just ask the experts.

Susie Shortsleeve, a real estate agent with Weston, MA-based Century 21 Shawmut Properties, likes to point to the immediate equity gain.

"Obviously, putting a substantial amount down on your home gives you an instant advantage in equity," she says.

Instant equity - For example, buy a $250,000 home with 20 percent down and not only will you have a new home, you'll have a cool $50,000 socked away in equity.

That's a nice nest egg, emergency fund or capital investment stake in something like college for the kids, a new start-up or renovations that will add still more value (equity) to your home.

You'll also be that much into paying off your mortgage now or in the future if you transfer the equity to subsequent homes.

Lender largess - Provided your credit is up to snuff, which is likely the case if you've been frugal and steadfast enough to amass 20 percent down, you'll get the best rate the lender has to offer.

That lower rate will bring smaller monthly payments and you'll also have a shot at negotiating away some of those junk fees.

"You save on the cost of buying the loan product (you don't 'get a loan,' you pay for it) when you have at least 20 percent down. You save either on the interest rate, the fees or later, on the costs associated with improving a low-down payment situation," said Mary Pope-Handy, a real estate agent with Sereno Group, in Los Gatos, CA.

Savings are due to the lender considering you a responsible homebuyer who has prepared for the purchase.

Mortgage insurance - Ryan Zuckerman, CEO of Homehub.com says buyers with down payments of 20 percent or more avoid mortgage insurance.

Studies show mortgages with 20 percent or more down are less risky than mortgages with less than 20 percent down. Lenders levy private mortgage premiums to cover their risk, but the homebuyer pays for the risk in the form of insurance premiums.

"Also, what is very interesting, is if you put down 18 percent, 19 percent or anything less then 20 percent down, you will be required by your lender to qualify and pay for mortgage insurance. So putting 20 percent down seems to be the magical number that lenders have set as the point at which they will not require you to pay for mortgage insurance," Zuckerman said.

Zuckerman said mortgage insurance can vary from an extra $75 to $300 per month, depending on your loan amount and credit score.

"If you plan on staying in the home for a while, it will definitely make financial sense to put the additional money down and avoid these monthly fees," he added.

And it's not just the upfront cost of mortgage insurance. It costs to get rid of the pesky premiums.

By law, lenders have to remove mortgage insurance once you reach a certain equity threshold, but if you want to remove it before you reach that threshold, it'll cost you.

A lender could allow you to remove mortgage insurance if you refinance and put enough cash in the deal to bring the mortgage down to 80 percent or less than the home's value.

"It's not only that you avoid mortgage insurance with a large down payment, you also avoid and the costs associated with improving the situation later. A refinance costs money. So does the appraisal you'll have to get (to prove value) to get rid of mortgage insurance," said Pope-Handy.

On some new Federal Housing Administration loans, you won't even have the option of removing mortgage insurance unless you refinance the balance down sufficiently.

Sellers' smiles - With 20 percent down, sellers know it's more likely you'll get the mortgage you need to buy their home. That will give you the edge in today's tough multiple-offer and all-cash market.

"Today's real estate market is simply brutal for buyers who are not fully armed with a full 20 percent down payment. In fact, 20 percent may not be enough," said Julie Wyss, a broker associate with Intero Real Estate in Los Gatos, CA.

"Inventory is low and there are multiple offers on almost every property listed (in Silicon Valley). It's in the seller's best interest to choose the buyer based on not only price, but also important terms. Right now the biggest issue in Silicon Valley is appraisals," she said.

"If the appraisal comes in lower than the purchase price, the buyer's lender will only lend on the dollar amount of the appraisal. The buyer needs to bring in cash to make up the difference between the appraised value and the purchase price and that could be more than 20 percent down," Wyss added. Some agents simply steer their sellers away from low-down buyers to save all sides time wasted on a deal that won't fly.

"As a listing agent, I am far more likely to advise my client to accept an offer with 20 percent, versus 10 percent or 3 percent. Success is far more likely with the 20 percent down," said Lance Owens a short sale specialist with Luva Real Estate in Kailua Kona, HI.