How to Save for a Down Payment on a Home
Buying a home can bring all kinds of emotions to the surface. From those warm fuzzy feelings of pride, joy and contentment to being stressed over details of the transaction, with one of the main details being the down payment. Saving money is practical when income exceeds spending. However, the combination of lower incomes coupled with inflation, it can become hard to save money for a down payment. The traditional 20% can seem daunting, but it is not impossible, nor is it required in all cases. This is how to save for a down payment on a home.
START A BUDGET
The easiest way to start a budget is to use a spreadsheet. Start with your monthly gross income and subtract taxes and other deductions-this is your net income. From here, subtract your monthly expenses such as rent, loans (car and student), credit cards, etc. With the money you have left, figure out how you spend it by keeping receipts for things like gas, utilities, phone, eating out, shopping, entertainment, etc. Find things that can be cut back. The bottom line is to bring in more than you are spending and try to find new savings sources.
OPEN A SAVINGS ACCOUNT
One of the easiest things you can do is to open a savings account. It is recommended to open an account at the same institution you have a checking account because most allow transfers of funds between accounts electronically and instantaneously. This makes it easy to move money into savings from your checking without hassle.
There are a number of homeownership programs that are offered by the US Department of Housing and Urban Development, those of which include assistance with down payment and closing costs. There are income and location requirements that need to be met to qualify. Some cities have teamed with lenders, real estate attorneys and homebuyer counseling agencies to offer homeownership help to low-income families.
SPECIAL LENDER PROGRAMS
Lenders offer programs that require only a small down payment. There are many programs that only require a total of 3% or 3.5% down payment. FHA mortgages require as little as 3.5% but do have upfront and monthly mortgage insurance payments. VA loans are for veterans and usually has no down-payment or private mortgage insurance and the VA helps the buyer secure a competitive interest rate. You can also check with your regional bank; they may offer special first-time homebuyer programs.
CHECK INTEREST RATES
There is a wide spectrum of interest rates for things such as credit cards, savings accounts, car loans and other accounts. Analyze your accounts and see if there is somewhere you can do better. If you have a credit card that you’ve made full and on-time payments, call the credit card company and ask for a lower rate. For car loans, run the numbers and determine if you should sell your current vehicle and get a cheaper one. You could also qualify for lower mortgage interest rates the more you have saved for a down payment.
A seller may be willing to help buyers with closing costs, especially if they want to sell quickly. With less closing costs to have to worry about, you can put more of your money towards a down payment. These are called seller concessions. There are limits on the amount of concession depending on the type of mortgage you get.
MONITOR YOUR CREDIT
Your credit score is key when looking at your ability to borrow money and the interest rate you will pay. This score is based on credit reports which show all your credit accounts, how much money you have borrowed, your total debt and the status of all your payments, including late or missed payments, and how much available credit you have. Mortgage lenders may be receptive to you if you have a small down payment and less savings IF you have great credit. Monitoring your credit will help keep errors and blunders in check or give you enough time to fix errors and disputes before applying for a loan.
It is important to a lender to show that the money used for a down payment comes directly from the borrower to show financial responsibility and ability to save. One of the exceptions to this requirement are monetary gifts-gifts from parents, relatives and friends are welcome. A letter stating there is no repayment expectation, interest, etc., is required from the donor to be recognized as a “gift”.
EMPLOYER ASSISTED HOUSING PROGRAMS
Some employers offer programs that help low- to moderate-income workers with down payment assistance. Contact your employer’s human resources or benefits personnel to find out more information.
When all else fails, you could always crowdsource your home. There are sites you can, such as Feather the Nest, to raise money for a down payment on a house.
For more information on buying a home or if you have questions, contact TCP Real Estate today!