The recent cratering of the real estate market both in the residential and the commercial spheres has dramatically altered how buyers will approach mortgages and home loans at present and for the foreseeable future. The game has changed and the days of no-money-down mortgages, or “NINJA” mortgages, are long gone. Determining how much to put down on a house is more important than ever, as is almost every other aspect of mortgage financing at the moment. With a shaky economy, new home buyers should prepare themselves for the possibility that real estate prices may fall again in the future.

Making wise decisions and doing your homework before taking the plunge can mean the difference between a halfway pleasant mortgage experience and a nightmare. Many first time home buyers are often left asking themselves the following important question: How much should I put down on a house?

Obviously, the minimum required down payment will vary depending on your circumstances, such as credit and employment history, income, and where you plan on buying, as well the type of mortgage you want and loan you end up taking out.

FHA Loans Require Only a Small Down Payment, but that Doesn’t Mean You Can Afford the House

For buyers with limited means, an FHA loan may be the only option. The minimum down payment is 3.5% for those who qualify. FHA loans now have more stringent requirements for down payments that depend on the credit rating of the borrower. Borrowers with a credit rating under 580 have to come up with a 10% down payment, and pay the Mortgage Insurance Premium of 2.25%.

These loans feature possible funding for capital improvements, as well as no penalties for early payment. The downside is that FHA loans may not be enough to finance the home you want, and the MIP may cost more than Private Mortgage Insurance overall.

20% Down Payment Still the Standard for Conventional Mortgages

A conventional mortgage will usually require at least 20% of the purchase price down to get the best rates, though this varies widely depending on which lender you decide to go with. The advantage of putting up more than 20% on any type of loan is the avoidance of PMI, or Private Mortgage Insurance. This is basically a monthly or yearly fee paid by the borrower to insure the lender against the risk of default on the mortgage. Typically, this will run something like $55 a month per $100,000 of financed home value, and can be up to $1,500 a year and can tack on significant additional costs to your mortgage payment.

VA Loans Offer Lowest Downpayment Requirements for Veterans, but Beware of Fees

For veterans, the answer to the question of “How much should I put down on a house?” is more clear cut. VA loans have many benefits and advantages, such as not requiring a down payment and not charging penalties for early payments. The PMI is replaced by the funding fee, which is 2.15% of the loan on average. The smartest way for veterans to play this is to take out a loan with no down payment, and pay off the loan as quickly as possible. It gives you budgeting flexibility for rainy days and can save a lot when it comes to interest payed over the life of the loan. The only problem is that not having to put up a down payment may goad buyers into taking out loans on homes that are ultimately out of their price range.

Determining the dollar amount of a reasonable down payment on a house involves a bit of strategy, forward thinking and simple arithmetic. On the one hand, laying down more cash at the beginning of the mortgage reduces monthly payments and interest charges.

However, this also will significantly draw down savings leaving you more vulnerable to mishaps and misfortune in the future should you run into unforeseen expenses. Life is uncertain and things can happen that you weren’t planning on, so you don’t want to leave yourself too vulnerable to life’s uncertainties by trying to pay off the loan too quickly.

Mortgages are never easy and will most likely be one of the most difficult and important financial decisions you face during your lifetime. In an area such as this, it never hurts to do too much research or to be over prepared with questions about every facet of the agreement. It almost always makes sense to put up more than the required minimum down payment on a mortgage.

How much more is the tricky part. The best advice for first time home buyers is to do the math, carefully weigh your options and be sure of what you’re doing before locking yourself into any long-term contract.

If you are in the market for a home loan or a mortgage, it is important to understand what an escrow account is. Many lending institutions require their borrowers to maintain escrows on mortgages, and even those who don’t require it often encourage it.

This is because a mortgage escrow reduces the company’s chance of losing their investment in your home through fire or lapsed property taxes. Many people, however, are unsure of what to expect from this type of account. They wonder, “What is an escrow account? Why do I need one? How do they work?” Below, you will find the answer to these and other questions about escrow accounts.

What is an Escrow Account?

An escrow account is an account where funds are deposited for the purpose of paying a bill or meeting an obligation. It is held by a third party, who is responsible for fulfilling the terms of the obligation. In the case of a mortgage escrow, the funds are used to pay property taxes, fire insurance, and other types of homeowners insurance.

Why Should I Have an Escrow Account?

On some types of loans, escrow accounts are required by law as a condition of receiving the money. Other times, mortgage companies refuse to finance mortgages without an escrow. Even if neither of these are the case, however, it is often in the best interest of a homeowner to keep an escrow account.

Property taxes can run into the thousands or tens of thousands of dollars, and insurance can cost as much as a thousand or more.

Often, the entire payment will be due at once. This is a huge burden for many people. By spreading the payments out over the course of a year, escrow accounts ensure that the money will be there when it is needed and these payments will be made on time. As a result, home owners can rest assured that they will not be faced with delinquent taxes or lapsed insurance.

How Does An Escrow Work?

As a general rule, the escrow account is created at the same time as the loan. The mortgage company estimates your taxes and insurance costs, divides the amount by twelve, and adds the amount to your monthly mortgage payment. Sometimes, they include a cushion to account for tax increases or missed payments.

However, by law this cushion can not amount to more than 1/6th of the total amount due. If either your taxes or insurance premiums go up, your escrow account payment will probably do the same.

How Much Does an Escrow Account Cost?

This depends on several factors. First, how much is your home worth? Both taxes and insurance are generally calculated based on the value of the home. Therefore, those who own a more valuable home can expect to have much higher escrow payments than those who own smaller homes.

Second, what are the taxes in your area? This will be a percentage of the value of your home, and it will often go up when new roads are constructed or new schools are built.

Finally, does your mortgage company add a cushion to your escrow payments? This can amount to as much as two full month’s worth of payments over the course of a year, so it is important to be aware of it in advance. As a general rule, however, you can expect your escrow account to add several hundred dollars a month onto your mortgage payment.

How Can I Be Sure that the Holder of My Escrow Account Is Making My Payment?

As long as your mortgage payments are not delinquent by more than thirty days, your lender is required by law to make your escrow payments on time. If they do not, they are responsible for paying all fees and penalties. However, there are times when this does not occur, either through negligence or fraud. There are several things you can do to avoid having this happen to you.

First, pay your mortgage on time. If you are more than thirty days late, your mortgage company’s requirements to make your payments may be waived. Second, pay close attention to your escrow statements. Lenders are obligated by law to list all deposits made and all payments disbursed.

Finally, make sure that your escrow account is being audited at least once a year. This can help you avoid the mistakes and fraud that often take place when escrow accounts are unmonitored.

Before the economic crisis hit, the majority of home buyers wholeheartedly supported no money down home loans. However, it seems that following the economic crisis no money down home loans have been taking metaphorical beatings from all angles. Frankly, the condemnation of the no money down home loan is uncalled for. The problem is that many people fail to build their own opinions on the matter off of personal observation and would rather rely on the opinion of a “financial guru.”

The financial guru worshipper flicks on the television and overhears Rachel Maddow and Suze Orman expressing their disapproval on the matter and claiming that home buyers who opt for no money down home loans will lead a foreclosure ridden homeownership, immediately they assume that the gurus are in the right. What most people fail to understand is that these are not factual statements. These statements are not based on extensive studies or scientific analysis. These statements are mere opinions, based off of personal observation and theories.

Admittedly, there is merit to their claims. Home buyers who cannot afford to keep up with monthly mortgage payments should not squeeze their way into premature homeownership with a no money down home loan. That is why so many people with no money down are facing foreclosure; premature homeownership. However, classifying all who opt for a no money down home loan into a foreclosure ridden home ownership is an inaccurate overgeneralization.

Recently married young couples who are fresh out of college with promising careers are ideal candidates for no money down home loans. First time home buyers who fit the above description have the funds to keep up with their monthly mortgage repayments, but they simply do not have the capital to pay for a traditional 20% down payment. Would you peg this young professional couple as “foreclosure ridden?” More often than not the answer would be no.

Those who are foreclosure ridden are heading in that path due to personal lack of money; it has nothing to do with the amount of money they coughed up for a down payment. Granted, the number of foreclosures would likely drastically decrease if unqualified home buyers weren’t given the opportunity to default on their loans, but the ones responsible are the lenders. If lenders would tighten up their lending strings, our economy would most likely be in a much healthier state than it is in now.

Why do I blame the lenders? I blame the lenders because of sheer irresponsibility. Handing out home loans to people who can not afford it to keep up with payments is like selling alcohol to a 15 year old boy; nothing good can come from it because he is not equipped to handle alcohol.

One of the biggest mistakes you can make in the world of real estate is biting off more than you can chew.  That is, buying more house than you can afford.  While determining how much house you can afford is not an exact science, there are some guidelines to keep in mind when house shopping.

The 28/36 Ratio

Most mortgage companies and other lenders apply what’s called the 28/36 ratio when determining how much house you can afford.  They typically require the monthly mortgage payment to represent less than 28% of your monthly income. Mortgage lenders also like to see all of your monthly debt obligations combined (including your mortgage), represent less than 36% of your income.

Obviously, some lenders are more liberal with these ratios than others.  If you are looking to make a frugal real estate purchase, you may want to apply your own limits – such as being debt free before purchasing a home, and keeping the mortgage payment less than 25% of your take-home pay after taxes.  This will mean you will be able to afford less house, but that is not necessarily a bad thing.

Plan For The Worst Case Scenario

Often when people are looking for a new home they apply the best case scenarios from their budget.  For instance, let’s assume Joe and Jill are looking to buy a house.  They both work, and earn a combined $150,000 a year.  They have no kids, and no debt.  They both drive older model, paid-for cars.  Based on this $150,000 annual income, and the fact they are debt free, they could afford to buy a very expensive house, according to most lender’s mortgage guidelines.

However, what Joe and Jill are not accounting for is the time when Jill becomes pregnant and wants to stay home with the baby.  Joe’s older car starts giving him trouble, and because of his commute and the need for a reliable car, he suddenly finds himself in the market for a newer car.  Suddenly, their annual income drops 60% and they have to take on a car payment.  Now that $2,700 mortgage payment looks nearly impossible to maintain, even though the lender qualified them for it just two years ago.

Things change; life throws us curveballs. Far better to anticipate those things ahead of time and plan for them by being more conservative at the buy.  If Joe and Jill had found a more modest home with a $1,500 mortgage, they could continue living  in the home, despite the hit to their income and other setbacks.  When planning your financial future, don’t always assume the best case scenario.  Hope for the best, plan for the worst, and live your financial life somewhere in the middle.

As the economy seems to sink lower into the ground than ever before, more homeowners are defaulting on their mortgage payments. Consequently, these homeowners are finding themselves face to face with foreclosure. If you fear foreclosure and feel that the only alternative is selling your home, think again. Homeowners that find themselves short on mortgage payments have created an ingenious alternative to foreclosure and selling:  sharing a mortgage by finding a roommate.

Photo courtesy of borman818

Roommates are no longer reserved for college students, nowadays even mature families with children are considering renting out a vacant bedroom in their home to meet their monthly mortgage payments. Are you opposed to renting out a bedroom in your home because it seem like a ludicrous invasion of privacy? If so, would you be willing to reconsider if I informed you that you could rightfully charge your new roommate in the range of $400 to $800 per month? Receiving that amount of money per month can be the difference between defaulting on your mortgage and making timely payments.

Understandably, the more amenities that you include in your roommate’s rental agreement, the more you can charge. Considering that you are likely in a time crunch to make your next mortgage payment, it is advised that you make the offer as attractive as possible. Paint the room a neutral color, if possible offer your prospective roommate the option of a furnished or unfurnished room and include certain monthly bills that are within your budget. Include utilities in the rental agreement; it will command much more attention. This is for the sake of your mortgage payments, so being a bit more lenient pays off. An offer that includes electric, heat and cable will be much more appealing to a prospective roommate than a listing where no utilities are included. Below are two examples of possible roommate listings; one is guaranteed to get a higher response rate than the other.

Sample Listing A
“ Spacious bedroom with private bathroom and balcony for rent. The monthly rent includes all utilities and extras: electric, heat, internet, cable and phone. Additionally, all interior living space, laundry room and backyard will be shared. Reserved parking space in garage included.”

Sample Listing B
“Bedroom for rent in family home. Kitchen, bathroom and living space will be shared. NO pets or smokers allowed. NO overnight guests and NO guests allowed after 8pm. Curbside parking is available.”

It’s clear which listing would garner more interest. If Sample Listing A were located in an in-demand metro area, the homeowner would be able to command a minimum of $800 per month and the vacancy would likely be filled within 30 days. This homeowner has the right idea and is on track to affording their mortgage payment. Sample Listing B, although located in a similar area, would only be able to command a maximum of $400 per month and the room would likely remain vacant for several months. Due to this home owner’s restrictions and inflexibility, the listing is unappealing and they would likely end up defaulting on their mortgage because a roommate could not be found.

In order to reach a large pool of prospective roommates, you must market your listing aggressively. Marketing methods that are both effective and inexpensive are posting your listing on Craigslist.com, purchasing ad space in your local newspaper, word of mouth and posting flyers in high traffic areas, such as: a supermarket, beauty parlor, car repair shop and medical office. Some homeowners even go as far as to advertise the fact that all funds will go towards their mortgage payment. If you are relentless in your marketing efforts and offer an appealing rental agreement, sooner than later your vacancy will be filled and you will be on your way to affording your mortgage.

One of the fastest ways to pay off your mortgage early is to make at least one extra mortgage payment per year.  Unfortunately, this requires that you come up with the extra payment each December (assuming you make your extra payment at the end of the year), and often requires you to submit separate checks or make separate transactions online to indicate the additional amount is specifically for mortgage principal reduction.  Fortunately, there is an easier way – biweekly mortgage payments.

Most banks and mortgage lenders will allow customers to make biweekly mortgage payments (your normal monthly mortgage payment made every two weeks), but many charge a fee to enroll in this plan.  What’s the benefit of making biweekly payments you ask?  Well, it is essentially the same as making one extra payment a year.

There are 26 biweekly periods in a year, and 26 monthly half-payments are the equivalent of 13 monthly mortgage payments.  Yes, that’s one extra payment per year.  Making one extra mortgage payment per year could shave as much as 6 years off a 30-year mortgage.

About.com’s Home Buying/Selling site put together a great example to demonstrat the benefits of paying your mortgage bi-weekly:

Let’s look at a mortgage with a principal balance of $150,000, a term of 360 months, and an interest rate of 6%.

Monthly principal and interest payment = $899.33
Total Interest During Life of Loan = $173,757

Using a Bi-Weekly Option
Bi-Weekly Payment = $449.67
Total Interest During Life of Loan = $135,294
The loan is paid off in 24 years instead of 30

So as you can see, using a biweekly mortgage payment plan shaved six years and nearly $40,000 in interest off the life of the mortgage. That’s a significant savings.

Before we get too far ahead in our quest to downsize homes, I thought it would be good for all involved if we first got prequalified on an amount well within our frugal household budget.  We submitted a mortgage application with a credit union we’ve been members of for many years and will hopefully hear something back from them next week.

The mortgage we applied for requires only 5% down with no PMI, something that is attractive to us since we don’t have a lot of cash to put down until our other house sells.  When it does, we’ll probably just put it on the mortgage balance so we can pay it off fast.

15-Year Versus 30-Year Mortgage

Though we are taking out a 30-year mortgage we plan to pay off the new house in ten years.  It’s an aggressive plan, but one we think we can hit from downsizing, using a little equity from our current home, and devoting some additional income to prepay the mortgage.

Payment Less Than 20% Of Income

To guarantee plenty of disposable income we are planning to bid on a home that will leave 80% of our monthly take-home pay available for other things.  Lenders will typically loan more than this, sometimes up to 28% of your gross income, but for us this would not leave enough money for other goals (though some months we will be dedicating much more than this to extra payments).

Hopefully, we will get some good news on pre-qualification and can start looking at houses in our price range next week.