How to save for a down payment on a home: part I
Purchasing a home marks a significant milestone in your life. We’ve already shared with you the 5 steps to buying a home, but what about before you even begin that process? While searching for the perfect property and finally finding the dream home you’ve been looking for is exciting, saving up the money for a down payment can be a bit daunting.
If you’re interested in purchasing a home, there are a few details to consider. Understanding the process can help immensely when deciding to purchase a home and set aside money for this substantial investment. As an interested buyer, you can become more focused when you know what to expect and how much money to contribute toward ownership of a home. Consider speaking to your trusted mortgage consultant to provide guidance early to help determine what kind of down payment you will need to provide.
The purpose of providing a down payment
Buying a home often involves acquiring a home loan to afford the purchase. This translates into monthly mortgage payments over the course of a set amount of time, during which you pay and become a full owner of your property. Because it is a loan from a mortgage broker, bank or lender, interest is also applied to the amount of money borrowed. So if you purchased a $100,000 home, you would actually pay more because of the interest rate affixed to the mortgage.
A loan serves a fantastic purpose in allowing homeownership to be more attainable for everyone, but fluctuating interest rates may drive individuals to refinance or put off purchasing a home to save more money.
This is the primary purpose of giving the seller a larger down payment when buying a house. If you can supply a larger down payment, you are more likely to be approved for a home loan. You will not have as much to pay off and may even increase chances of obtaining a lower interest rate.
Low down payment options
There are programs available that allow individuals to qualify for a home loan despite only being able to provide a small down payment. Government-sponsored enterprises, such as Fannie Mae‡ and Freddie Mac‡, can provide an interested homebuyer with a 3 percent down payment option‡. However, higher interest rates and other requirements are put in place to help protect the lender. Gifts from family members are also allowed, but check with your loan officer to see what guidelines may apply.
Another agency that makes homeownership more attainable is the Federal Housing Administration‡. An FHA loan can help offer financial assistance when purchasing a home‡ through a variety of programs such as fixed-rate FHA loans for people purchasing their first home. There is an option for everyone that will make navigating through the real estate industry easier.
An FHA-backed loan protects a lender in case a borrower is unable to continue with his or her mortgage payments. By providing this insurance, qualified buyers who have a difficult time providing a larger down payment or have a lower credit score due to debt accumulated during his or her education can still become homeowners.
Another way the amount of your down payment can affect your total monthly payment is when mortgage insurance is added, often referred to as PMI (private mortgage insurance)‡. For example with conventional loans, PMI may be required if you don’t put down at least 20 percent. This protects the lender if the borrower should default on the loan. Even if you put less than 20 percent down, the mortgage insurance cost is lower if you put down 5 percent rather than 3 percent or even lower with a 10 percent down payment rather than just 5 percent.
Additional costs to consider
Before someone decides to start saving up money, knowing how much to save is a crucial factor one must contemplate. Working with a trusted lender can help guide you and provide information to help determine what loan will be best for you and how much of a down payment will be required. According to U.S. News & World Report‡, a buyer will not pay merely the agreed selling price, but also will need to designate funds for additional expenses such as:
- Closing costs
- A home inspection
- Appraisal fee
- Credit report fee
In addition, some purchases may require a homeowner’s association fee to be paid as well as private mortgage insurance. Buyers should account for these expenses when creating a budget and starting a basic savings account for this exciting purchase.
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Jackie Ahumada is a mortgage loan officer with UMB Bank. She has more than 10 years experience in the mortgage industry and more than 18 years in management of customer service delivery and operations.