For most prospective homebuyers, saving up for a down payment is seemingly the biggest obstacle to homeownership. Down payments are usually a percentage of the home purchase cost, typically paid upfront at closing. Generally, the higher the amount you put down on a home at closing, the less you’ll pay in interest and fees over the loan’s lifetime.
How Much Do I Need for a Down Payment?
The right amount really depends on your financial situation, home prices in your area, and the type of loan you choose. Ideally, preparing financials and setting aside money to help pay for the home’s purchase price as a down payment is recommended. This allows you to avoid paying additional private mortgage insurance (PMI), pay less in interest and fees, and start with more equity in your new home.
Do I Need to Have 20% for a Down Payment?
Not really. Many homebuyers, especially first-time buyers, make down payments of less than 20%. In fact, most people put only 6-12% down. If you have a good household income but very little saved in the bank, you can get a conventional mortgage with as little as 3% down. Additional options, such as U.S. Federal Housing Administration (FHA) home loans, require the borrower to put a down payment of at least 3.5% of the home’s value. It’s even possible to buy a home with no money down if you qualify for a VA loan or a USDA loan.
How Does the Down Payment Affect My Loan Approval?
Having a higher down payment increases your chances of mortgage approval as lenders will likely consider you more financially sound and, thus, a lower credit risk.
How Does the Down Payment Affect My Mortgage Amount?
Simply put, the smaller the down payment, the more you’ll have to borrow to buy a home and vice-versa. When you borrow more, you typically make larger monthly mortgage payment as higher mortgage amounts result in higher interest rates and mortgage insurance payments.
Down Payment Assistance Programs
Down payment assistance (DPA) is a specialized low-interest loan or grant that reduces the amount needed to save for a down payment. Requirements may vary by location, but if eligible, homebuyers could get thousands of dollars in down payment assistance.
What Other Costs Do I Need to Consider When Saving for a Down Payment?
When planning for a down payment, be sure to factor in other costs associated with buying a house.
After saving for a down payment, closing costs can come as an unpleasant surprise if you’re not properly informed. Closing costs refer to the fees required to finalize a mortgage. Typically, they include homeowner’s insurance, appraisal fees, property taxes and mortgage insurance. These costs can be added to the loan amount and paid as part of your monthly mortgage.
Also known as discount points, mortgage points are fees a buyer pays a mortgage lender for a reduced interest rate. How do points work? With reduced interest rates, you can lower your monthly mortgage payments. One point costs 1% of your mortgage amount. A $250,000 mortgage then would cost $2,500 and lower the interest rate by a given percentage, depending on the lender. To ensure that you won’t be losing money, you need to first calculate your break-even point, which is when the interest you save is equal to the amount you paid for mortgage points.
How to Save for a Down Payment on Your Future House
Set Monthly Savings Goal
If you’re planning on buying a home, decide how much you’ll need to save for a down payment and determine a realistic timeframe for saving that amount. For example, if you want to purchase a $200,000 home in 24 months with a 20% down payment of $40,000 (including closing costs and other expenses), you’ll need to put aside around $1,700 each month.
Need help calculating a mortgage and down payment you can afford? Try some of the FREE, easy-to-use mortgage calculators available online, like Nerd Wallet’s to get started on your savings goal.
Figure out what your biggest spending drains are and determine which ones you can live without or reduce. Do you eat out a lot? Maybe start eating at home more. How much do you really watch all of those premium streaming services? Possibly just pick one or two of your favorites and cancel the rest. Try trimming your clothing budget or take a break from the gym and start working out on your own. You’ll be surprised how much money you can save by just cutting a few expenses.
Automate Your Savings
To remove the temptation to spend money on other things, allocate a certain percentage of your regular pay to go directly into a savings account to save up enough for your down payment.
Boost Your Income with a Side Hustle
Pick up a side job or gig to bring more income your way. Your side hustle doesn’t have to be torture; think of something that you love and make some money doing it.
The Time to Start Saving Is Now!
Saving for a down payment isn’t as hard as you might think. Ironically, it’s even easier now while we’re still living with the current pandemic economy. In fact, according to a recent article in The Atlantic, in the first few months of the coronavirus pandemic, the personal savings rate for Americans up and down the income scale rose by almost 30%. With a little planning, a few budget cuts, and some will-power, you can be a happy new homeowner in no time. And when the time comes and you’re ready to buy, be sure to check out the listings of all the beautiful homes available here on Offerpad.com!