Saving for a home: Tips for building your down payment

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You’ve rented your entire adult life, but you’re starting to think about taking the plunge into homeownership. Although you don’t have enough money saved for a down payment yet, you’re ready to start saving money in earnest.

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“It’s cliché, but it’s better to start saving as soon as possible,” said Robert Heck, vice president of Mortgage at Morty, an online mortgage broker. “Your mortgage lender can tell you how much mortgage you will qualify for. »

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

“Saving more than you think you need is a great way to build a buffer — ideally enough to have six months of emergency funds after the close, he said. “A down payment will be the biggest initial 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 significant amount of money is to cut out all the little things and wait for the savings to add up, you’ll probably be waiting a long time,” he said. “Eliminating larger expenses like rent, car expenses, and high-interest debt can help build up more savings. Once you’ve thought about ways to reduce your biggest expenses, you can start to move on to smaller expenses.

He said it’s also wise to start thinking about ways to increase your income. This might mean setting aside a large tax refund, saving all of your year-end bonus, or asking your boss for a small raise.

If you’re able to get the latter, Heck advised putting your extra earnings directly into savings.

“Generally, 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 dollar amount of your regular salary to go directly into a savings account for your down payment can help eliminate the temptation and ability to spend that money on other purposes.”

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

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

Ultimately, he said a DTI ratio in the 30s or 40s is a good goal.

Before buying a home, Michele Hammond, Senior Home Loan Advisor at Chase Home Lending, agreed that it’s a good idea to watch your budget carefully, to make sure you can pay your future mortgage payments without guilt. ‘Buyer.

“Before buying a home, a good prep 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’ll have adjusted your lifestyle to manage a mortgage, and at the same time, you’ll have saved a good chunk of money to spend on the down payment, closing costs, payments upcoming mortgages or unexpected “upper repair” costs for your new home.

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More than just having money for a down payment, Hammond said closing costs — meaning expenses like appraisals and inspections — should also be considered.

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

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

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

Learn: how to buy a house with no down payment

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 deposit less than 20% without paying the PMI.

Even so, the median down payment for homes purchased with financing is 6.6% of the median sale price, as of Q3 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. Figure out your budget as soon as possible, so you can calculate how much you’re going to set aside and create a budget that matches your goal.

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Last update: September 24, 2021

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