Are you saving money to buy a house? Great choice! For most Americans, their home is their number one investment and a substantial portion of their net worth. You might be asking yourself, “How much money should I save?”
Generally, the more the better, but at some point, you’ll need to repurpose your savings into home equity (i.e., make a down payment on your home). How much of a down payment is enough? That depends on the following three factors: your ability to save, your loan program, and market conditions
Determine How Much You Can Save
How much do you already have saved for your home purchase? How much can you save between now and your closing date? If you are just beginning a home search, you may have several months or even a year to prepare. Or you might have a very short window of time to find your next home due to a job transfer or other event. Either way, save as aggressively as you can. Even if you go over your goal, the extra reserves will help get your loan approved at the most favorable interest rate possible.
Talk to A Loan Officer
Get pre-approved before you start looking for a home. This way, your loan officer can advise on loan options that might be a good fit for you. There are many different mortgage programs and each one has a unique set of underwriting guidelines, including the down payment requirement and maximum loan amount. Plus, your credit score, income, and capacity for loan repayment all affect the mortgage program (and therefore the down payment requirement) that your lender can offer.
For example, loans insured by the Fair Housing Administration (FHA), are attractive to purchasers because the program requires a modest down payment of 3.5%. This lower down payment threshold does assume that certain other underwriting requirements have been met. If borrowers apply with a lower credit score, an FHA loan might still be possible, but the down payment requirement could be up to 10% of the purchase price. Also, most loan programs will require an appraised value that substantiates the purchase price. If the appraisal comes in lower than the agreed-upon sales price, the contract terms may need to change before closing. If you think you may qualify for an FHA loan, plan to save a minimum of 3.5% of your anticipated purchase price plus closing costs (more on closing costs later).
What if you’re not going FHA? Conventional loan requirements vary. Conventional borrowers should plan for a down payment of 10-20%, though some applicants will be offered financing terms with a down payment as low as 3%. Jumbo loans require a down payment of at least 10%. Loans guaranteed by the United States Department of Veterans Affairs (VA) typically do not have a down payment requirement. Down payment requirements for exotic, in-house, or seller-funded loans can vary greatly at the discretion of the lender.
If you’re considering a move and would like to talk with a loan expert at Ruoff, get started here.
Ask Your Realtor About the Market
Your Realtor is a great resource when it comes to market conditions. While he or she may not be able to advise on your specific loan product, your Realtor will know what you can do to make the best possible offer. In today’s low-inventory market, buyers who make larger down payments may be favored over other house-hunters, regardless of what their lender requires. Beginning with a substantial investment in your future home lets the seller know that you have the ability and the intention to get to the closing table quickly. This may help your offer stand out above the others.
Closing Costs in Addition to the Down Payment
It may not be advisable to ask for closing cost assistance when making an offer in a seller’s market. Plan to save for these expenses yourself in addition to your down payment. Your agent and loan officer can advise on the expenses you will incur before and during closing, but plan to pay for an appraisal, title insurance, lender fees, closing fees, taxes, and insurance. You might also pay a brokerage fee, inspection costs, and survey fee. Other areas and situations may necessitate additional expenses. Saving at least $3,000 for closing and other costs, but that number is just an estimate.
Some borrowers may need to pay off judgments or collections before a final loan approval is granted. Also, if your debt-to-income ratio is high, your loan officer may suggest paying down some of your revolving debt to obtain loan approval and/or to qualify for a more favorable interest rate. Most loan programs call for cash reserves (money in the bank) at the time of closing, so save more than you will need for all debts and expenses.
How To Start Saving
When you’re ready to start saving, begin with a budget. Good, old-fashioned budgeting is how fortunes are made and homes are purchased. Most household budgets are simple. You can start with a line-item spreadsheet listing all monthly expenses and the amount you expect to pay for each. Include a monthly savings goal as one of your “expenses.” Some savvy budgeters use apps like Mint, others just use a spreadsheet like Google Sheets or Microsoft Excel. At the end of the month, enter actual expenses next to the planned monthly expense to see if your household is at, over, or under budget. Next comes the important part. Consider whether all of your expenses were warranted and what you could do to devote a little more to your savings next time. Cost control builds wealth! Every dollar saved brings you closer to the goal of homeownership.
Creating a budget takes time in the beginning, but eventually, the recording and monthly review become routine. Stay the course and keep saving. The more money you have for a down payment, the better position you will be in to negotiate the terms of your home purchase. Plus, your budgeting skills will serve you long after the closing.