Buying a home is a big step in life and a significant commitment. Most of us will need to use a Bank or Lender for funding the home we want to buy. For this step, a majority of programs require a down payment. A Down payment for a home loan is the amount, in percentage, that you need to pay towards the total price of your desired home. A down payment on a house in high cost areas can be a difficult factor. With the right planning and realistic expectations, you can have the money you need for the down payment on your home.
Planning for Your House Down Payment
The planning stage of the home buying process starts with a pen and a paper. Write down your net monthly income and start subtracting you fixed living expenses (rent, insurances, utilities, etc.) and continue to deduct your variable living expenses (gas, credit card, food, clothing, entertainment, etc.). The primary factor to keep in mind when planning to save for your house is to be realistic with your household expenses. Consider family, kids, and unexpected expenses. Your total expenses should be within 35-50% of your total income. This figure would help you to have enough money left to start putting in a savings account.
One thing that you should also keep in mind is that saving money takes time, commitment, patience, focus, and discipline. Getting together with a mortgage specialist from the beginning is crucial in the planning stage of your home buying process because a mortgage expert can help you figure out the amount you will need for your down payment according to the type of loan you qualify.
How Much to Save for Down Payment?
Once your mortgage specialist tells you the total amount you will need, you will have a more exact idea of the time needed to save the money and the amount of money you will need to put in your savings monthly. The necessary down payment that any bank requests is 20 percent down payment on the total price of the house. One advantage of having the 20 percent down is that you can avoid paying monthly PMI (Private Mortgage Insurance — an insurance type used in case your mortgage payments become in default) which can add to your mortgage payments.
However, most of the time 20 percent down is not possible. According to Zillow, 55 percent of home buyer put less than 20 percent down in a home loan. Thanks to many programs from the government available, if you meet the criteria for some loan types, the down payment can be less than that, for example:
- VA Loans (Veterans Affairs) - 0%
- USDA Loans (Department of Agriculture) - 0%
- FHA Loans (First Time Home Buyers) - 3.5%
- Conventional 97 Loans - 3%
- Home-Ready / Home Possible Loans - 3%
Outside of these types of loans, there are some states and local help programs that can also help with your down payment. Another reason why it is so important to have a mortgage consultant by your side from the beginning.
Some Options to Save Money
Sometimes, home buyers will opt for borrowing from their retirement, borrowing from friends, receiving gift money from family & friends, sell their stocks or investments, or using leftovers from an earlier home sale. However, if you plan to do it the old-fashion way, by saving money monthly, here are a few tips:
- Transfer a stipulated amount of money every month from your bank account into your savings account. You can even ask your bank to do it for you.
- Skip your vacation for a year and save what you would have spent on it to your savings.
- Lower your variable expenses which are food, gasoline, entertainment, etc. You will be amazed on how much money you can save.
- Stay away from paying for things with your credit cards. Pay them down or off and after that call your credit cards companies for a better interest rate.
- Working extra-time or a second job for a while can help you find the extra money to save.
- Hold yard sales in your home. Selling some home items, you do not need or use, will not only help you declutter your home but also help you add money to your savings.
- Look into down payment help available in your area.
Even though it may take a little longer than what you wished, saving for your down payment can be done if you follow the proper methods and stay focus. If buying a home for your family or yourself is a priority, and an essential step you are planning to take in your life, give us a call today. We would love to sit down with you and help you with planning the best path to get to your home.
References
Wendy Connick. (11 Aug. 2017.). How to save enough money for a down payment on a home. CNNMoney. Retrieved from http://money.cnn.com/2017/08/11/real_estate/save-down-payment/index.html
Cynthia Meyer (11 Jun. 2017.). How to Save For A Down Payment on A First Home -- Without Giving Up Avocado Toast. Forbes. Retrieved from https://www.forbes.com/sites/financialfinesse/2017/06/11/how-to-save-for-a-down-payment-on-a-first-home-without-giving-up-avocado-toast/
Lewis, Holden (6 Mar. 2018.). What Is A Down Payment on A Home? | Bankrate.com. Bankrate. Retrieved from https://www.bankrate.com/finance/mortgages/down-payment-1.aspx
Mortgage Learning Center (n.d.). Down Payment - What is a Down Payment? | Zillow. Mortgage Learning Center. Retrieved from https://www.zillow.com/mortgage-learning/down-payments/
BB&T Bank. (n.d.). Top 10 Ways to Save for a Down Payment | Education Center. Bbt.com. Retrieved from https://www.bbt.com/education-center/top-10-ways-to-save-down-payment.page