Saving for a down payment
There is a common misconception that you need 20% down payment to buy a house. There are special VA loans for Veterans that don’t require any down payment. You can DubbleUpp with an investor and the investor will cover all your upfront costs. Most other programs have a minimum of 3% which means $3,000 per $100,000 in loan amount. Each mortgage loan program may have different down payment requirements, different amounts you will need left over in bank account after closing, and potentially extra costs if you have a smaller down payment. If you are not putting down 20% as a down payment, you will most likely have to pay some form of mortgage insurance with your monthly mortgage payment. Along with your down payment, you will also be responsible to pay closing costs when buying a new home. Those extra closing costs will vary based on your location and may range from 2%-6% of the home’s purchase price. In our next course (“Preapproval”), we go over closing costs in more detail. Your CityWorth loan officer will also be able to walk you through the options and find the best program for you.
Sources of down payments
Once you reviewed the programs with your loan officer, you’ll know how much you need for upfront costs. Not all of this has to come from your savings. You can receive gifts to help cover the costs. You borrow against your 401K and then pay yourself back. You can even get creative and sell off old collectables that you have been keeping in boxes. Like your loan program, your CityWorth loan officer can also help you figure out different sources and what will work in your situation.
Budgeting for your down payment
Your first step was establishing the amount you need to close on your new house. If you don’t have that amount accessible right now, your next step is creating a plan to get there. You’ll want to set a date that you want to have the amount saved and then work backwards to calculate the amount you need saved every month. To keep you from using your savings for every day things, a good tip is to setup an automated schedule with your bank to transfer the need amount every month. You won’t see it in your main account and will be less tempted to dip into you savings.
When deciding what house you want to purchase, the most important thing is to have a good grasp of your budget. You must analyze your financial picture and make smart decisions with how large of a home you want to purchase.
Fixed Monthly Bills – How much in bills do you pay per month and how long are you going to be paying them? The mortgage payment will be around for 15 to 30 years.
Flexible Monthly Expenses – What are your monthly expenses outside of bills, and what is a reasonable figure to plan for things like groceries, going out, recreational activities, gas, child care, etc.
Savings – Saving over time will be essential to living a comfortable lifestyle. You need be sure you have room in your budget to save over time for a rainy day.
Stick to the Plan
Once you have purchased your home, be sure to maintain your home savings plan
- Set up your payment arrangements for your mortgage payments due on the first of each month. Direct deposit with your bank is a great option to ensure timeliness of payments.
- Avoid making any additional large purchases in the first 6 to 12 months after closing while you adjust to being a homeowner. Mortgage always comes first!
- Regular maintenance and repair on your property
- Updates and renovations – be aware that not all updates or renovations will add dollar for dollar value to your home’s potential resale value.