How Will You Fund the Down Payment of Your New Home

One of the components a lender uses to help determine what loan amount to approve is your down payment. A down payment not only serves as a commitment on a borrower's behalf to make good on a loan, but also acts as a lender's guarantee to minimize risk in case a borrower defaults on a loan. The more of your own cash that you can put down for a loan, the easier it is to qualify for a higher loan amount or a lower mortgage payment.

Alternative sources of funding

Since most borrowers do not have large cash reserves on-hand for a down payment, there are other alternative sources for funding. Besides tapping into your own savings accounts, other resources may include relatives, 401(k) plans, proceeds from stock sales, appraised assets, even a co-signer.

Many cities, looking to expand their communities, even offer their own down payment subsidy programs for first time homebuyers. It's not uncommon to be gifted $5,000 to $30,000 without expectation of re-payment.

Loan-to-value ratio

A down payment is always expressed as a percent of the sales price and often referred to by lenders at the "loan-to-value ratio" or LTV. For instance, a $250,000 mortgage with an LTV of 80% would require 20% down or $50,000. Using a down payment calculator can help you see what influence a different down payment can have on your monthly mortgage.

Other down payment options

Some banks even offer zero-down percentage loans which require no down payment. These types of loans are typically directed at first-time buyers with good credit who are qualified to make the monthly payment but cannot come up with a down payment. However, without a down payment the buyer has no equity in the house and the lender is at greater risk, so the interest rate could be higher.

Another alternative to buying a home without committing to a down payment is to consider a lease option to buy. As a renter, you have an option anytime during the term of the lease to buy the property at an agreed upon price from the owner. In some instances, the money you've put toward rent can be fully or partially applied toward the down payment.

Sellers can also assist buyers with their down payment. By offering a carry-back mortgage, sellers can sell their house faster in a competitive market and buyers can purchase a home they otherwise might not be able to afford.