Saving for the Down Payment for Your New Home

Saving for the Down Payment for Your New Home

If you’ve been renting but dreaming of owning a home, you aren’t  alone.  Many would-be home buyers, though, are concerned that they can’t afford it.  Saving for the down payment for a new home is a big concern.  If you’d like to trade in your rental for a place to call your own, here are some steps you can take.

Determine how much your monthly payment would be.  First, see what the price range is for homes in your desired community.  If the average price of a home in your desired neighborhood is $200,000, you can use an online mortgage calculator to calculate an estimated monthly house payment. Play around with different levels of downpayment to see how either increasing or decreasing the downpayment will affect your monthly mortgage payment.  By doing this exercise, you will have a better idea of what your down payment will need to be for the house you want (closing costs will also be needed — this is an additional 2-6%).

Start saving now. It takes time to build up enough savings for a down payment for your new home. “Among first-time buyers, 28 percent save for six months or less, while 13 percent save for more than five years,” Traditionally, the typical down payment for a home has generally been 20 percent.  However, there are a variety of programs that can open the door to homeownership with as little as 3 percent or even no money down (USDA and VA loans are no money down options).

First-time homebuyers with low to moderate income levels may be able to qualify for a conventional loan through Fannie Mae with a 3 percent down payment. “Community mortgage products are better than [Federal Housing Administration] loans because the mortgage insurance is much less expensive and the down payment requirement is lower,” explains Gina Pogol, consumer finance editor at Charlotte, North Carolina-based LendingTree.

The FHA backs several kinds of mortgage programs. FHA loans can be used to purchase a homes with only 3.5 percent down, as long as they have a credit score of 580 or higher and qualify for financing,” Pogol says.  Another FHA program is the 203(k), which can be used to buy or refinance property that needs to be rehabbed or just updated from a 1970’s decor.”
You can start saving by setting up a special savings account and automatically transferring a set amount into it each month. Deposit any bonuses or gifts (or your tax refund) into this account as well. How long it will take to reach your down payment goal depends on the amount you need and how much you are able to sock away each month. “For someone buying a $200,000 property with 3 percent down, saving $500 a month, it will take a year. And there are still closing costs to deal with,” Pogol says.

Consider alternative down payment sources. There are other options in addition to your personal savings, which include gifts from relatives or friends or a withdrawal from your individual retirement account for a first home purchase. If you are lucky enough to have a generous relative or friend willing to gift funds for your down payment, you are required to furnish an official letter documenting that for your lender.  Speak with your lender so that you understand your bank’s rules in regard to documenting the downpayment gift.  Also, make sure that you understand what penalties or taxes may result from the withdrawal of funds from your retirement account.

Minimize payment shock. Consider how much you can actually afford, starting by looking at what you are paying in rent. If you are looking to buy more house than your current rent payment, Pogol recommends potential homebuyers “test drive” the higher monthly payment.  “If your current rent is $1,000 a month and you want to buy a home with monthly principal, interest, taxes and insurance – called a ‘PITI’ payment – for $1,400 a month, I’d recommend that you put $400 a month into savings and see how hard or easy that is,” Pogol says.

Consult with a lender early in the process.  In addition to saving for the deposit, you may also need to make other financial “tweaks”.  Will your monthly debt payments exceed the ratios required by the bank?  Are there judgements that need to be satisfied? Do you have past bankruptcies or foreclosures that affect your timeline for getting a mortgage?  While you are saving, make sure that you are doing all that you need to do to be financially prepared to buy.

Although the path to homeownership can take some time, there are financial benefits, including the mortgage-interest deduction on your income taxes, an increase in net worth and stability of monthly home payment.  However, the intangible benefits often outweigh economic factors.  There is the pride of home ownership, the freedom to have your home reflect your personal style and the security of having your own space.

If you are looking to buy or sell your home in the Chicago area, give me a call or email.

Millie C. Lumpkin, Broker