Overcoming the Down Payment Hurdle

The down payment presents the biggest obstacle to homeownership for most buyers, especially first-time buyers and those in lower income brackets. Fortunately for those people, lenders have become more willing to underwrite mortgages with small down payments.

Most mortgage lenders require a cash down payment of 5%, 10% or 20% of the sale price. Some lenders have zero-down mortgage programs. If you can put down more than your lender requires, say 25% to 30%, your lender may be willing to overlook credit blemishes, approve your loan without verifying your income or both. If you come up short on the down payment, with less than 20% of the buying price, before your loan is approved you may have to obtain private mortgage insurance, or PMI, to protect the lender.

You can often lower your mortgage payment or afford a more expensive house by putting more money down.

Lowdown on down payments

Say you make $40,000 a year. Your maximum monthly mortgage payment (28% of gross income) would be $933. Assuming your total monthly debt is no more than $1,200 (36% of gross income), the bigger the down payment, the more expensive the house you can buy.

Say the monthly mortgage payment of $933 has an interest rate of 7.5%. In a 30-year fixed-rate mortgage, that monthly payment covers a total principal of $133,435.45. With 10% down, that mortgage would cover a house worth $148,262. With 20% down, the house price would be $166,794.

Say you want to keep the monthly payment to $1,060. How large a mortgage can you get? The charts below consider the key factors of interest rates, down payment amount and the length of mortgage term.

You may now want to turn to the Bankrate.com calculator How much house can you afford? to calculate your down payment. If you are selling a home, you can apply the equity as a down payment on the new house. Note: You need to include an estimate of closing costs in buying the property (plus selling costs if you're also selling a house). Closing costs are generally 3% to 5% of the sale price.

Now that you've calculated what your down payment will be, here are some tips to help you meet your goal:

• Have your down payment ready at least 60 days before you apply for a mortgage loan.
• Start saving now and forgo other expensive cash buys, such as a new car or vacation trip.
• Borrow your shortfall from the equity in your 401(k) retirement plan. You will be charged prime rate with possibly a small margin added on, but you'll meet your down payment goal and you can repay your retirement fund through your payroll deduction plan.
• Borrow from family members and pay them back monthly. Before lenders will factor the amount into the loan, they may require you and your family members to sign a "gift letter" indicating that both parties consider this a gift.

If you still come up short on the down payment, don't despair. There are special mortgages and first-time homebuyer programs to help you buy your dream home.