So You Want To Buy a House?
Step 2: How Much Is Needed For a Down Payment?
Joseph Schutz, CDPE, GRI, SFR, BPOR, GREEN
Broward & Palm Beach Realty
Last week in step #1 we covered cleaning up your credit report and improving your score. This week, we’ll go over ‘How Much You Need To Save For The Down Payment’Saving for a first down payment and building home equity can be a way to build wealth over time. Here’s what you need to know about saving before you buy.
- In general, it is a best practice to put down 20% or more in cash when buying a home, however lower down payment loan programs are available.
- Investing can help you reach your down payment savings goals faster than only saving in a cash account.
Buying a home is typically the largest single purchase a person will make in his or her lifetime. When you are preparing to make a big purchase in real estate, it is important to understand the complexities of what you can afford, what everything will cost, and how to prepare for your purchase.
Your down payment is a one-time cash payment you provide when you place your offer. The size of this payment has a long-term effect on your finances, as it determines your monthly mortgage payment and your initial home equity. The higher your down payment, the lower your monthly mortgage amount.
The good news is that today there are several mortgage loans that allow the buyer to make very low down payments. The most popular of these are the FHA loans. The Federal Housing Administration (FHA) loan program was established to help buyers with low credit scores, little savings and low incomes gain entry to homeownership. There are two down payment options: 3.5% of purchase price for applicants with credit scores above 579 and 10% for very low scores between 500 and 579. FHA loans have strict home inspection and appraisal standards. The house must be safe for the occupants and structurally sound for underwriting purposes.
Borrowers with slightly higher credit scores and low to moderate incomes should consider Fannie Mae’s HomeReady mortgage with a 3% down payment. There is no Private Mortgage Insurance (PMI) ever, appraisals are not required, and credit scores below 660 are allowed with sufficient income.
So now that we know it’s possible to buy a house with as little as 3% down, how does a buyer acquire these funds?
Dedicated savings account
If you don’t have a savings account, now might be the time to open one. A checking account is great for daily expenses, but if you arrange to have a portion of your pay check deposited automatically into your savings account, you’ll be less likely to spend it. You’ll also earn interest on your balance, however there is a direct correlation between the interest rates for your mortgage and the interest rates for your savings account. As one goes down, so does the other.
Because we have historically low mortgage rates, we also have very low savings rates.I still recommend having a dedicated savings account though, where you can see how you’re progressing toward your goal.
CDs and money market accounts offer higher gains than savings accounts. You’ll need a larger minimum balance than for a regular savings account, but your goal is to make it grow, not shrink, right? If you’re using a CD, just make sure you don’t withdraw the money before the time is up or else you’ll face some stiff penalties.
Tap into your IRA
Another great place to stash your cash? A traditional or Roth IRA. In addition to being a tax-friendly retirement vehicle, it allows you to withdraw up to $10,000 for a home. While withdrawals from a traditional IRA will be taxed, a Roth IRA you’ve owned for more than five years won’t be taxed at all, as long as you’re a first-time home buyer. Just be careful with this method, though, as you will be denting your retirement funds. But combined with other savings, it can quickly add some heft to your growing nest egg.
Check out down payment assistance programs
Most consumers don’t know about down payment assistance programs. A great place to start is Down Payment Resource, which offers a handy calculator that can show you what you may be eligible for. Many multiple listing services nationwide display a special icon on the listing of a property that might qualify for down payment assistance. Many options are also listed by state, or you can check your state on the Department of Housing and Urban Development website.
Also check with your agent and lender for programs available in your specific county, because they change frequently—and these professionals should be up on the latest options. Most offer up to $15,000, typically in the form of a grant or low-interest loan. Most require your income to be below the area median. But even if you make more, do your research—there are programs that provide funds for higher-income households.
In Ft Lauderdale there is a First-Time Homebuyers Program — 954-828-4527
This program assists income-eligible homebuyers purchasing a property in the city limits of Fort Lauderdale with a loan up to $75,000 towards their down payment and closing costs.
Housing Opportunities for Persons with HIV— 954-828-4775
Housing assistance and support services for HIV positive residents. Services include independent living, and emergency financial assistance to prevent homelessness.
Once your down payment is on a roll, it’s time to start looking for a home—and to do that, you’ll need to determine exactly how much house you can afford. Tune in next week…