T Nation

Buying a House. Down Payment Question

Hey Everyone,

I have been reading online but can’t seem to find an answer to my question.

Here is my situation:

I was going to buy a house for around $320k. I have about $30k saved up, and was going to borrow $35k from my brother so that I could get conventional financing. The reason I am doing this was for one main reason, and that is that I heard that you can offer less on a house if you are coming in with 20% down as opposed to someone who is offering and is using FHA (for example) and not putting as much down.

Is this true?

I know that I will be saving money as far as no PMI, but I will be paying interest on the money I loan from my brother (he would take out a line of credit for around 4 - 5% interest), so I won’t be saving THAT much (I don’t think anyways) by getting a loan from him, I just thought I could offer less for a house than someone coming in with a lesser down payment.

Honestly, I would pay an extra $100 - $150/month to not have to borrow from my brother. I have no worries about paying it back, and he said he wouldn’t be worried about it either; borrowing from family or friends has never been my favorite thing to do as it can make the relationship complicated (especially if something were to happen).

However, if an offer for someone with 20% is the same as someone with 3.5% down than I would prefer to put a lot less down on the place. Is there a benefit when it comes to the % down you put on a house other than the PMI they take off at 20% (and the somewhat lower interest rate you get with conventional)?

Any (educated) opinions greatly appreciated!

Thanks

I’ve never heard of being able to offer less based on the size of the down payment. Is this a short sale or foreclosure or some other odd circumstance? A larger down payment may help you get chosen if there are multiple bids for the same property but it should have no bearing on the cost of the property.

[quote]Wilba wrote:
I’ve never heard of being able to offer less based on the size of the down payment. Is this a short sale or foreclosure or some other odd circumstance? A larger down payment may help you get chosen if there are multiple bids for the same property but it should have no bearing on the cost of the property.[/quote]

Yes, I was thinking about purchasing a short sale.

[quote]Wilba wrote:
A larger down payment may help you get chosen if there are multiple bids for the same property but it should have no bearing on the cost of the property.[/quote]

This is the only scenario I can see where it would matter. I bought a home last year. 10 of us bid asking price on a foreclosure. The bank goes with the highest cash down payment, all other things being equal.

So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

Ya, I can see that; however, I work a sales job and make all of my commission in the summer/fall, so I should have a good chunk of money coming in… But you guys are right, another 6 months of waiting won’t hurt, just in case.

[quote]markdp wrote:

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

Ya, I can see that; however, I work a sales job and make all of my commission in the summer/fall, so I should have a good chunk of money coming in… But you guys are right, another 6 months of waiting won’t hurt, just in case.[/quote]
If it’s a short sale, you might be waiting another 6 months just to hear back from the banks, so don’t expect it to close quickly.

[quote]markdp wrote:

[quote]Wilba wrote:
I’ve never heard of being able to offer less based on the size of the down payment. Is this a short sale or foreclosure or some other odd circumstance? A larger down payment may help you get chosen if there are multiple bids for the same property but it should have no bearing on the cost of the property.[/quote]

Yes, I was thinking about purchasing a short sale.[/quote]

Assuming this isn’t a competitive bid situation I wouldn’t worry about adding to the down payment. Leave it at 10%. The interest rate on your mortgage has got to better than what your brother is going to get borrowing on a line of credit. It’s also not a good idea to borrow that kind of money from family or friends unless it’s a real dire situation.

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

I understand where you guys are coming from, but the fact is that any of those things - especially medical - can wipe you out pretty quickly even if you do have savings. Edge, I get that’s why you emphasized at least 5 and preferably 10, but if life decides you kick you in the nuts, you’re pretty much screwed whether your savings acct has $0 or $10k in it

[quote]markdp wrote:

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

Ya, I can see that; however, I work a sales job and make all of my commission in the summer/fall, so I should have a good chunk of money coming in… But you guys are right, another 6 months of waiting won’t hurt, just in case.[/quote]

Never base a decision on projected cash flow at a future point in time. If you don’t have it today, you don’t have it PERIOD!

Your financing will have nothing to do with what you purchase price of the house is.

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

If this was truly done, I bet less than 10% of Americans would be home owners.

[quote]PeteS wrote:

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

If this was truly done, I bet less than 10% of Americans would be home owners. [/quote]

Ya, I agree. It took me quite a while to save up $30k, and while I should be able to save another $15k or so this year cuz I’m making more, I don’t know. For some reason I feel like the more I make the more I spend, without trying to.

Don’t forget, you’re gonna need some cash most likely for the new house to buy stuff, more so if you’re a 1st time homebuyer.

We just closed last week, went from renting to our 1st house, and money is flying out the window at this point. Every trip to Target or the such is $200 now. We budgeted for a lot of this, but can’t imagine if we were coming into this with very little savings.

[quote]jehovasfitness wrote:
Don’t forget, you’re gonna need some cash most likely for the new house to buy stuff, more so if you’re a 1st time homebuyer.

We just closed last week, went from renting to our 1st house, and money is flying out the window at this point. Every trip to Target or the such is $200 now. We budgeted for a lot of this, but can’t imagine if we were coming into this with very little savings.[/quote]

Ya, I have all of the major stuff from renting for so many years. The only thing I don’t have is a washer/dryer (my roommate now has one and is planning on moving in w/me).

I am actually doing this to save money, as I figure my mortgage w/10% down and all of the PMI and other bullshit will be around $2k/month. I will have two renters @ $600/month, and a tax savings of around 5 - $600 a month, so after all is said and done around $500 - $600 a month rent + equity building. I am paying $1000/month rent now where I am at and no equity building. Shoot, I could have one roommate (as I do now) and still be paying the same, albeit a much bigger house (I have 1900 sq ft 3/2 w/no upgrades and the homes I am looking at have 4/3 w/pool and big time kitchen upgrades).

And no I will not claim the renters… cash only bitches lol.

[quote]markdp wrote:

[quote]jehovasfitness wrote:
Don’t forget, you’re gonna need some cash most likely for the new house to buy stuff, more so if you’re a 1st time homebuyer.

We just closed last week, went from renting to our 1st house, and money is flying out the window at this point. Every trip to Target or the such is $200 now. We budgeted for a lot of this, but can’t imagine if we were coming into this with very little savings.[/quote]

Ya, I have all of the major stuff from renting for so many years. The only thing I don’t have is a washer/dryer (my roommate now has one and is planning on moving in w/me).

I am actually doing this to save money, as I figure my mortgage w/10% down and all of the PMI and other bullshit will be around $2k/month. I will have two renters @ $600/month, and a tax savings of around 5 - $600 a month, so after all is said and done around $500 - $600 a month rent + equity building. I am paying $1000/month rent now where I am at and no equity building. Shoot, I could have one roommate (as I do now) and still be paying the same, albeit a much bigger house (I have 1900 sq ft 3/2 w/no upgrades and the homes I am looking at have 4/3 w/pool and big time kitchen upgrades).

And no I will not claim the renters… cash only bitches lol.[/quote]

Better make sure you dont piss em off. Easy way to get back at you

EDIT: or so I’ve heard. Not sure if ~14k/year in unreported rental income is enough to make the IRS come after you.

[quote]KBCThird wrote:

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

I understand where you guys are coming from, but the fact is that any of those things - especially medical - can wipe you out pretty quickly even if you do have savings. Edge, I get that’s why you emphasized at least 5 and preferably 10, but if life decides you kick you in the nuts, you’re pretty much screwed whether your savings acct has $0 or $10k in it[/quote]

Any of those major expenditures can wipe you out really fast anyway, yes. However, that doesn’t mean he shouldn’t plan for any mid-level problems either. If his furnace goes out soon after he moves in (random example of something that could go wrong), that’s a $1-4K repair. Won’t break the bank if you have some savings, but a really big problem when you have no reserve cash. Likewise with car problems or something similiar.

[quote]Blaze_108 wrote:

[quote]KBCThird wrote:

[quote]on edge wrote:

[quote]Blaze_108 wrote:
So you’re going to spend all of your savings, pick up a loan from your father, spend all that, and take on a $255k loan with no money? Better hope you don’t have any unexpected big money expenditures (illness,job loss, need a new car, etc).[/quote]

I agree with this. Wait till you can put 20% down on your own plus still have at least 5 grand left after everything is closed. And I mean AT LEAST 5 grand. Preferably more like ten grand.[/quote]

I understand where you guys are coming from, but the fact is that any of those things - especially medical - can wipe you out pretty quickly even if you do have savings. Edge, I get that’s why you emphasized at least 5 and preferably 10, but if life decides you kick you in the nuts, you’re pretty much screwed whether your savings acct has $0 or $10k in it[/quote]

Any of those major expenditures can wipe you out really fast anyway, yes. However, that doesn’t mean he shouldn’t plan for any mid-level problems either. If his furnace goes out soon after he moves in (random example of something that could go wrong), that’s a $1-4K repair. Won’t break the bank if you have some savings, but a really big problem when you have no reserve cash. Likewise with car problems or something similiar.[/quote]

Totally agreed. All I was trying to say was a) dont think you’re bulletproof because you have $10k in the bank b) don’t wait until you’re 100% financially sound against anything before making a major move, because you likely never will be

One other unexpected expenditure that can very quickly rack up that we forgot to mention: legal fees

In this housing market I would come into it with as little cash as you can and would strongly discourage you against borrowing $ from a family member because this can turn into a shit sandwich in a hurry.

If you rely on the lion’s share of your income from commission, I would go back over the term of your employment and look at what the average income is. I would then look at your worst month and use it as kind of a go/no go point and would base my price range around worst case scenario, not best.

This is coming from a guy who has been self-employed for more than ten years and has had his share of ups and downs. In a situation where you eat what you kill, it can be chicken one day feathers the next and it’s not always what you think can happen that does and leaves you spinning.

Also, foreclosures are a much quicker close than a short sale. I actually recently short sold a house and bought another short sale. It’s a huge convoluted story but the house we bought had a second on it and you would not believe some of the stupidity we went through. The house was literally 3 weeks from full foreclosure which meant the 2nd mortgage would then have no claim and they still tried to play hardball with us over a couple grand. The ink was literally dry, we were going to close and I got a call at 11 in the morning (2 hours before close) that the 2nd and 1st were arguing over the HUD. The good news was it actually saved me 3 grand on the purchase price because they asked us to come to closing with more cash in hand and we told them no. Ended up negotiating it in our favor.

If you have the time, I would tell you to watch a property you like, see if it goes foreclosure and then swoop in. The reality of things is you will get a home with no warranty but often times they are sold with cash back to the buyer.

Short sales are a hassle and they blow up all the time. Pick half a dozen properties you like and hope a deal falls through and grab it as a foreclosure. It will save you a lot of head ache, IMO.