How to Build a Down Payment Fund
By Phillip B. Burum, Executive Vice President, Diversified Pacific, President, Building Industry Association (BIA) Baldy View Chapter
The decision has been made and the preliminary steps have been taken; this is the year you have decided to buy your first home. You have worked diligently over the past six to twelve months to get your credit score in order and it’s now time to start saving for the down payment.
In today’s world of instant gratification, the concept of saving money for a future purchase is almost unheard of, but as with anything worthwhile in life, you will need to form a plan and stick to it. Knowing your overall budget for the purchase will help you set goals for your down payment fund. Typically, lenders will qualify you for a monthly payment equal to about 28 percent of your gross annual income. There are free mortgage calculators on the web that will help you determine the home price that can be purchased based on a specific monthly payment.
In a prior article, we provided information on the various types of loans that are generally available, each having advantages and drawbacks, depending on the circumstances of the borrower. Take a minute and visit the BIA website at www.biabuild.com and search the archives for the article on mortgages. That will help guide you on the amount of your targeted savings. Generally speaking, a lender will require between five and twenty percent for a down payment.
When developing your budget for a down payment fund, factor in common additional expenses that are part of the home buying process, such as home inspection fees, escrow and lender fees. Many of these costs can be absorbed into the loan but It is better to have a bit of excess saved than to be short at closing day.
If you are buying a resale home, it is also important to recognize that you may have to or want to make improvements to the home after you move in. It is not crucial to have saved enough to make all of your dream improvements on day one, but it is advisable to have a bit of a buffer fund in case something comes up that needs to be addressed sooner than planned.
The goal is now set and it’s time to tighten the belt and start saving. Most Americans can sock away a few hundred dollars per month fairly easily by cutting down on the morning coffee runs or simply going out for dinner one less night per week. But, if your goals cannot be met with a few hundred dollars per month, it is time to take a serious look at your spending patterns and your actual needs. A thorough analysis may lead to the realization that a thousand dollars or more can be shaved off of your current monthly expenses.
Now is not the time to plan a family vacation and it is worth considering the value you are getting from that $400.00 per month car payment. Will you accomplish your savings goals faster by trading in for a reliable car that doesn’t have a monthly payment? These are all things that must be considered if you are serious about getting into your new home.
Consider letting family members and friends know that you are saving for a home and, rather than conventional holiday gifts, cash would be a great alternative. If any of those gifts are substantial, ask the donor to sign a ‘gift letter’ indicating that both parties consider the donation a gift. Lenders will be looking at several months’ worth of bank statements and any deviations from the norm will need to be explained. It is better to have the letter in hand when the question is asked than to try to obtain one later when you are trying to finalize your paperwork.
Lastly, consider attending a first-time home buying seminar so you can better understand your options without being influenced by someone who has a financial interest in the home or loan you choose. One of the best resources for this is the U.S. Department of Housing and Urban Development (HUD)’s www.HUD.gov website which offers free housing counseling and seminars.