Down payment

Pretty much every mortgage requires a down payment, which is a lump sum of cash you pay upfront when you buy a house. A down payment is calculated by taking a certain percentage of the price of the house. This amount can vary from as low as five percent to 20 percent or more. A $200,000 house might require a 20 percent down payment, which would mean that you would be required to pay $40,000 upfront in order to obtain a $160,000 mortgage.

People with credit problems might be required to pay an even larger down payment, depending on their financial histories.

Obviously, coming up with that kind of money can be difficult for young people, first-time buyers, or low-income families. Special arrangements are often available to such people.

For anyone who can afford to do so, however, it is much better to make the down payment as large as possible. This is especially true if you want to buy a large house, or a house in a city with a high cost of living.

Why, is this true? The answer is that your income will dictate the amount for which you will be able to get a mortgage. Lenders know that you can only be expected to allocate so much of your money toward living expenses. To illustrate this point, pretend that any person with an income of $50,000 is eligible for a $150,000 mortgage. A buyer who paid $30,000 upfront could finance a house that cost $180,000. Alternatively, a buyer with a $50,000 down payment could afford a $200,000 house.

In any case, make sure that your down payment funds are available at least two months prior to your mortgage application.