Will you be saving for a house? Why HOW you save matters.

Saving money for a house is important for many reasons other than the obvious that you typically will need a down payment. Some of us may be fortunate enough to have that “rich uncle” with deep pockets to help out. Many will qualify for a low to no down payment loan. However, the vast majority of us need to buckle down and get the money in the bank.

 

Preparing for a higher housing expense

Budget – Ugh! I’ve never come across too many people who love to budget. For most of us, it is a struggle and high on the list of procrastination.

IF you are going to buy a house, you really need to get clear on your current budget. Otherwise how will you know what you can afford? For details on how to do this; check out “What can YOU afford?”

Once you have determined what you can afford; chances are it will be more than you are paying for rent or current house payment now. As part of your saving for a home; at least take that extra amount (the difference between your current rent/house payment and what you feel you can afford) and put it in savings. Make the savings deposit on the same day as your rent/house payment so you get accustomed to the feel of that money leaving your pocket each month.

Now you are saving money for a house AND easing your pocketbook into a higher housing expense.

What if you plan on buying a home with no down payment?

Down payment amounts are so closely tied with the loan program. You very well may be able to find a loan program that requires no down payment or will allow the entire down payment to be a gift. If you qualify for those programs – great. However, what if you don’t?

What if you’ve had some credit challenges to the point where your actual loan approval may be in jeopardy? What if your new house payment pushed the debt to income ratios higher than the loan program guidelines allow? When a loan underwriter (the approval person) reviews your application; if she can see you have history of saving money, it could tip the loan into an approval.

If you do get into the house with no down payment; you’ll soon discover that setting up a new home requires some cash. From major items like furniture and appliances to the smaller purchases for taking care of the yard; it can add up quickly. You just took on hundreds of thousands of dollars of debt. Wouldn’t it be preferable to avoid additional financing and more payments on top of your new house payment?

Counting on a family gift?

Most loan programs will allow a family member to gift you the cash you need to purchase a home. Depending on the program; there may be a restriction, however, that you need to come up with a portion of that money. It is usually somewhere from 1 to 3% of the sales price of the home.

You could find out that the loan program requiring the 1 to 3% of your own money has a much better interest rate and drops your monthly payment dramatically? These are all questions to discuss with your loan officer, however, there is no discussion if you don’t have the money.

When you receive a gift from a family member; there are very specific steps and documentation that your lender will ask you to provide. So, unless the gift was received months ago, you’d be advised to hold off getting the gift funds until you talk to a lender. It can be a huge challenge to go back and create certain documents after having already received the money.

Typically a lender is going to look at your personal savings and investment accounts for the last 2 to 3 months. If you received a family gift prior to that; just consider it your own funds and not “gifted.” I’ve seen this happen quite a bit in the case where you may have received money from multiple relatives as a wedding present, graduation gift, etc. That is nearly impossible to document to the lender’s satisfaction; so just make sure you have had the funds in your account for at least three months.

Conclusion

There really is no average down payment for a house. In my 40 years as a loan officer, there was always a no down payment loan. However, depending on the economic environment at the time; the restrictions or availability for loan programs can change. For example, after the “housing crash of 2008,” you could not find a conventional loan program for less than 5% down. Ten years later and even conventional financing is available with some lenders for as little as 1% down.

The best way to prepare when saving money for a house is to just do it. It will help your monthly budget become accustomed to the probability of a higher payment. It may tip the underwriter to approve your loan if you are “marginal.” If it turns out you didn’t need it; it will make your post-house purchasing expeditions a lot more enjoyable with a little coin in your pocket!

If you have any questions, comments or feedback on this article, there is space for you below to do so. Happy Saving!

 

 

 

 

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7 Responses to Will you be saving for a house? Why HOW you save matters.

  1. Jim Holzgrefe says:

    Good information for first time buyers!
    My wife and I are retired Realtors® and can’t tell you how many times new clients have approached us to look at a house and when we ask about their mortgage plans they’ll say, “So and So Company has a no down payment mortgage.” Of course our next question is, “have you talked to them yet?” Prior preparation will save you time and money when house hunting. And learning how to make that mortgage work for you is a good first lesson!
    Keep up the good work!
    Jim

    • Leissa Gebert says:

      Thank you, Jim.  My mission is to reach those buyers BEFORE they even talk to a lender; so your comments were very affirmative for me.  As you know, there is at ton of homebuyer education out there; however it’s either offered by a lender whose goal is getting a loan application or a government entity.  The government sponsored classes are so full of information, I find it’s hard to figure out what pertains to you and what you should do next.

      Unfortunately mortgages are so complicated that buyers drift toward the only things they know to ask (1) What’s your best interest rate (2) how much down payment and (3) what’s my payment.  We only wish it was that simple.  🙂

  2. Kev, “in a perfect world” a minimum 10% down would be a good thing. During my career as a mortgage broker, I always felt a degree of concern when someone was able to buy a house with absolutely no money out of pocket. If they were unable to save any money to buy a house; what would happen if a financial emergency occurred?

    You should have witnessed how “scarey” in was during the years leading up to our housing crash in 2007-2008. Lenders were offering mortgages to people without the need to verify income OR down payment. If you had a good credit score; you got a loan. Talk about the “writing on the wall,” right?

    Appreciate your comments and I am in complete agreement with the savings priority!

  3. Robert says:

    Great article.

    Very important perspective for us all to remind ourselves of.

    Having been in several different places of finances over the years it is helpful to have information related to those and future experiences.

    The three months guideline you informed is helpful for some to plan even further ahead even if some of the money is gifted.

    Times are always a changing. Thank you for providing this information for guidance.

    Really appreciate your information

  4. Melanie says:

    Your post grabbed my attention as I’m currently saving to buy a house and will welcome any tips. getting the down payment money is one of my biggest problems, but I’ve just recently got a full time job so it’s easier for me to get a mortgage.

    I love your advice about budgeting. This is something I feel like I have to work on more. Your article is really going to be helpful in working on my budget plan.

    Thanks

    • Leissa Gebert says:

      Good for you, Melanie!  In my personal experience, the best way to budget is the method you will stick with…. just like dieting, right?  I’ve tried all types of programs and finally just created a spreadsheet for myself.  I also take 10% right off the top of any income I make and put it in an account that take a bit more effort for me to access.  That alone has been the biggest help.  (I started doing this with only 1% to get in the habit).  Don’t forget the KISS principle.  🙂  Good luck with your working toward being a homeowner!

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