5 Simple Ways to Work Towards a Down Payment
Updated: Aug 3, 2020
Many first-time homebuyers feel intimidated when looking at the price tags of homes for sale in their area. The national median existing single-family home price in the first quarter of 2020 was $274,600, up 7.7% from the first quarter of 2019, according to the National Association of Realtors (NAR). An FHA loan requires as little as a 3.5% down payment--that’s $9,611. Putting 20% down ($54,920) would allow you to avoid mortgage insurance every month and ultimately have a lower monthly payment and a lower interest rate. If you’re a first-time homebuyer, you might find it a little overwhelming to save for a down payment of this size. Here are five ways to work towards this:
1. Grants for first-time homebuyers
Several local and national organizations offer grants for first-time homebuyers that can be used towards your down payment and/or closing costs. It’s important to note that these programs are generally intended for buyers with a household income of 80% or less of the Area Median Income (AMI). (Check Hud.com for more information on what the limits are in your area.)
Here’s a link to one of my favorite websites on grants for first-time homebuyers: https://downpaymentresource.com/ The site will show you what you might qualify for.
On the national level, Federal Home Loan Bank (FHLB) works with many banks to offer a grant for first-time homebuyers. In addition, local Community Development Corporations (CDC’s) offer grants for first-time homebuyers that are income-based and tied to a particular location where community development efforts are underway.
2. Stick to a spending plan
Create a spending plan that will allow you some flexibility each month but also allow you to see where your money goes. This will help you to make the cuts necessary to save more of what you earn. Cutting bills that recur monthly can have a huge impact on your annual budget!
3. Make an appointment with a financial advisor.
Meeting with a financial advisor who you trust can be a great first step towards saving for a down payment. Timing is everything! A financial advisory will talk with you about the best time to purchase a home depending on your financial situation.
4. Make an appointment with a mortgage lender.
A mortgage lender will consider your overall financial picture and then give you an idea of what price range you should look at. It’s very helpful to do this before you look at homes to be sure that you’re looking in the right price range. A lender will also give you an estimate of what your monthly mortgage payment for a house could be and of course, what sort of down payment you should expect. Rates are so low now that you may be surprised at just how low this number could be. It’s definitely worth getting an estimate!
5. Tap into your retirement savings account
If you’re a first-time homebuyer, you may be able to borrow up to $10,000 from your individual retirement account (IRA) to put towards your down payment. You may also be able to take money out from your ROTH individual retirement account (IRA) without penalty, if you only take out what you put in, not the earnings. Talk to a financial advisor for more info on this one!
The idea of purchasing your first home seems much more feasible when you think through the logistics of how to work towards your down payment. The price tag also seems so much less intimidating then! Yes, the purchase of a home is a complicated transaction but realtors, mortgage lenders and financial advisors are all great resources to help you through the process.