Tips for building your down payment


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You’ve been a renter your entire adult life, but you’re starting to think about getting into homeownership. While you don’t have enough money set aside for a down payment yet, you are ready to seriously start saving money.

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“It’s cliché, but you better start saving sooner rather than later,” said Robert Heck, vice president of mortgages at Morty, an online mortgage broker. “Your mortgage lender can tell you how much you will qualify for a mortgage. “

If possible, he recommended saving more than the bare minimum.

“Saving more than what you think you need is a great way to build a reserve – ideally enough to have six months of emergency funds after closing,” he said. “A down payment will be the biggest upfront expense on the road to homeownership. “

When it comes to saving for a down payment, Heck recommended making some major changes to your budget.

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“If your strategy for saving a large amount of money is to just take out all the little things and wait for the savings to pile up, you’ll probably wait a long time,” he said. “Eliminating larger expenses like rent, car expenses and high interest debt can help save more. Once you’ve considered ways to cut back on your biggest expenses, you can start cutting back.

He said it is also wise to start thinking about ways to increase your income. This could involve setting aside a big tax refund, saving your entire year-end bonus, or asking your boss for a small raise.

If you are able to guarantee the latter, Heck has advised you to put your additional income directly into savings.

“Usually the safest place to save money for a down payment is in a high yield savings account,” he said. “Automating the savings process by allocating a certain percentage or amount of your regular salary to a savings account for your down payment can help eliminate the temptation and the ability to spend that money on others.” purposes. “

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He also recommended calculating your debt ratio, which is your monthly debt payments divided by your gross monthly income.

“A debt-to-income ratio of 50% is usually the highest rate mortgage lenders will accept on a mortgage loan, but [it] depends on the loan program, ”he said. “When Morty is working with borrowers, we always remind them that this is calculated on the basis of gross income – before tax – so they should weigh these monthly expenses alongside disposable income and other recurring costs such as food and other living expenses. “

Ultimately, he said that a DTI ratio in the 1930s or 1940s is a good goal.

Before buying a home, Michele Hammond, senior mortgage advisor at Chase Home Lending, agreed that it’s a good idea to carefully monitor your budget, to make sure you can pay your future mortgage payments without the remorse of lending. ‘Buyer.

“Before buying a home, a good preparation tactic is to set aside an amount comparable to what your mortgage would be on a monthly basis in a savings account,” she said. “After doing this for six months, you will have adjusted your lifestyle to manage a mortgage and, at the same time, you will have saved a good chunk of the money for down payment, closing costs, upcoming mortgage payments or an unexpected “top fixer”. the costs of your new home.

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More than just having money for a down payment, Hammond said closing costs – that is, expenses like appraisals and inspections – should also be factored in.

“These can be up to 3% or more of the final purchase price,” she said. “While there is no way for a buyer to completely avoid paying these fees, there are ways for homeowners to save on them. “

For example, she said that some banks offer assistance with closing costs to customers who take out a mortgage with the financial institution.

Ultimately, the type of mortgage you take out will determine the minimum down payment you need. For example, you will need to pay at least 3% for a conventional loan or 3.5% for an FHA loan.

Learn: How to Buy a Home with No Downpayment

Keep in mind that you usually need a 20% down payment to avoid having to pay for private mortgage insurance, which adds to the cost of your monthly payment. However, some lenders offer mortgages that allow you to put less than 20% down payment without paying PMI.

Despite this, the median down payment for homes bought with finance is 6.6% of the median selling price, in the third quarter of 2020, according to Attom Data. This is an increase from 5% in the second quarter of 2020 and 4.7% in the third quarter of 2019.

Regardless of the size of your target down payment, building up your savings will take time. Determine your budget as soon as possible, so you can calculate how much you’re going to put in and create a budget that matches your goal.

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Last updated: September 24, 2021

This article originally appeared on Saving for a Home: Tips for Building Your Down Payment


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