How Do I Save for a Down Payment on a House?
“How do I save for a down payment on a home?”
I’m often asked this by young homebuyers eager to purchase their first home. And it’s a relatively easy question to answer.
You save as much as you reasonably can. And save routinely.
Not the answer that you’re looking for?
It’s because you’re asking the wrong question. Ask a vague question and get a vague answer. You should be asking, “How much of a down payment do I need to make to purchase a home?” The question is more specific. If you know the answer to that question then you can work the math to understand how much you need to be saving.
Most lenders are looking for a 20 percent down payment. That’s $50,000 on a cozy $250,000 home. And if you wanted to purchase that home in 5 years or so, you would need to save about $850 a month.
Whoa, whoa, whoa… Hold up. Did he just say 20%
As daunting as it sounds, if you can save up the 20 percent, you’ll have a better chance of being approved for the loan. You’ll also most likely get a better rate on your mortgage and benefit from the following:
- Lower upfront fees (Cool)
- Lower ongoing fees (Yes!)
- Instant equity into your home (Yay)
- And a lower monthly payment (I’ll take that!)
But don’t get caught with your pants down! The down payment isn’t the only money you’ll have to bring to the table. There are also closing costs to consider as well. And if you don’t have the money for that, it will take away from your down payment and that could complicate your closing.
What if you can’t reasonably save the $50,000?
That’s a good question, and rarely is anything ever black and white. Depending on your financial situation, lenders might have various different programs and options that could help with your down payment.
You can actually buy a home with as little as 3 percent down with some programs that mortgage lenders offer. The Federal Housing Administration (FHA) is a government agency charged with helping homebuyers – especially first timers – get approved. The FHA assists these mortgage lenders to make loans by guaranteeing a portion of the balance. This is how you can put less money down – in fact, as little as 3.5 percent.
There are also programs for active or retired military service members. You may have access to zero down payment programs through Department of Veteran Affairs (VA). Your lender should be asking you these kinds of questions. It’s always a good idea to ask them about down payment options when you’re shopping around.
Which costs more?
Do you want to put down the $50,000 (20%) or $7,500 (3%) down on that $250,000 home? Or are you wondering in the back of your mind about the zero down option? The question might seem as ridiculous as it is to ask you to save the $50,000. I mean you might blow the money once you reached just $10,000. Am I wrong?
If you’ve already decided on the 3% down, you didn’t read the fine print.
A lower down payment makes you an exponentially huger risk in the eyes of the lender. That’s why they’ll look to available government programs to guarantee a portion of the loan. You will pay for this guarantee in the form of a mortgage insurance. You will have to pay an upfront fee and are likely going to have an ongoing charge built into your monthly payment.
Now some programs don’t require mortgage insurance, but will charge an “upfront guarantee fee” or “funding fee.” Whatever they want to call it, a fee is a fee. And the higher the risk that you are, you’ll likely pay a higher interest rate for the life of the loan in addition to other fees. These fees, over time, is like wind, sun and rain beating down on painted wood. It’s damaging.
Make smarter money decisions. Get help.
If buying a home is a new goal of yours, there’s a good chance that you haven’t saved enough. This is where we come in.
We’re financial planners for young professionals and families. Helping our clients achieve their financial goals like saving for a large capital purchase. We can help manage your existing student loans and debt to give you the best chance at securing a home mortgage. We can help you budget and save efficiently, using less money for your down payment.
Not only can we help you with budgeting, freeing up your cash flow, and investing wisely. We can also help you achieve your life goals like buying a home. We can keep you on target by reviewing your cash flow and offering alternative savings options. We can make sure that you don’t spend too much on the home and question your financing decision. As financial planners, we are the only thing in the middle of our clients and their next financial mistake. Let us help.
I hope you find this educational and useful. If you would like to talk, schedule a free consultation with me using this link.
Here are some helpful tools and resources aimed to inform and empower you when you’re looking around.
- Guide to loan options: A primer on the loans available to help you finance your home. In this resource, you’ll find information on the length or term of loans, whether a loan is fixed or adjustable, the different loan types available, including FHA and VA loans.
- Tool to see what interest rates are offered to people in your situation: A dynamic tool that lets you input your information, like credit score and down payment, to see what interest rates people with similar financial situations have been offered. You can play around to see how different factors affect the rates.
- Guide to closing documents: A document that explains the important closing forms, so you know what information is on the forms, and where to find it.
- Closing checklist: Closing is when you finalize your mortgage. You need to go into the process prepared and ready to enter into your contract. Our checklist helps you to realize what you need to do and gets you ready for closing, one step at a time.