Saving for a down payment

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Saving for a down payment

These days it is not unusual for lenders to require a down payment of as 20 percent on the purchase price of a home. This makes a lot of sense from the lender’s point of view for several reasons.

First, buyers who can save that 20 percent show they handle their finances well. Second, with that much money tied up in a home’s equity, homeowners are much less likely to default on a loan. Finally, a large down payment means less money is owed on the house, so monthly payments are smaller. All good reasons, but 20 percent can amount to a lot of money and can be difficult to accumulate.

Find a deal with a lower down payment

A sensible first step is for potential buyers to learn whether they quality for a loan with a lower down payment. REALTOR® Michael Guthrie of Roy Wheeler Realty Company, past president of the Charlottesville Area Association of Realtors (CAAR) and host of the Real Estate Matters radio show Saturday mornings from 10-10:30 on WINA 1070, says there are several programs available to help homebuyers.

“The Piedmont Housing Alliance folks have financing available to help certain people with down payments,” he says. “There are some restrictions on how long you must live there and income levels, but they are great. They also offer classes about budgets, mortgages, and other important information.”

The Piedmont Housing Alliance administers the CAAR Workforce Housing Fund, a loan fund designed to help local teachers, firefighters, law enforcement officers, and nurses purchase affordable homes by providing down payment and closing cost assistance. Recent changes in the fund’s guidelines allow these members of the workforce to purchase anywhere in the Thomas Jefferson Planning District (Charlottesville plus the counties of Albemarle, Fluvanna, Greene, Louisa and Nelson) and to access a low 3 percent rate on the borrowed funds. Find more information at www.PiedmontHousingAlliance.org.

Many people are surprised to learn the United States Department of Agriculture (USDA) can be another source. “USDA rural loans can be used in certain designated areas,” continues Guthrie, “including parts of Albemarle County. Most real estate agents will know if a particular property would qualify for a USDA program, but it wouldn’t hurt to check yourself. These loans require no down payment.”

The USDA program guarantees such loans which may be obtained from various lenders. Applicants generally may have an income of up to 115% of the median area income; reasonable credit histories; and resources to afford the mortgage payments, taxes and insurance. Loans are for 30 years and, according to the website at  HYPERLINK “http://www.rurdev.usda.gov” www.rurdev.usda.gov the dwelling must be “modest in size, design, and cost.”

Another government agency that can help is the Federal Housing Administration. “With an FHA loan, you can do as little as 3.5 percent for a down payment,” Guthrie says, but cautions, “some buyers don’t consider the closing costs that could amount to another 3.5 percent or more. Often the buyer can ask the seller to pay some of those closing costs.”

The United States Department of Veterans Affairs can be another source of a home loan. “VA loans are great,” declares Guthrie. “Depending on length of military service, a buyer can get as much as 100% financing up to certain amount. If the local lender is a direct endorsed lender—that is, the VA knows that lender complies with all the VA guidelines—they can underwrite without involving VA and that makes it quicker.  And the seller can pay as much of the closing costs as possible.”

On some loans, he explains, the seller is limited in the amount of closing costs they may pay. A REALTOR® or closing company can explain this.

Another source might be your workplace. Check with your employer’s Human Resources department to see if any sort of home-purchase assistance benefit is offered.

Put the Goal in Writing

Some people simply decide to “really work hard to save,” but that’s much less effective than setting a definite goal. A goal should be 1) specific, 2) measurable, and 3) have a definite time frame. A classic example was NASA’s aim to put a man on the moon (both specific and measurable) by the end of 1960s (definite time frame.)

Putting that goal in writing and posting it somewhere to see it regularly will reinforce the savers’ motivation. The goal might be posted on the kitchen bulletin board or the top of a daily planner at work. (There are even apps to post goals on computers or phones.)

Let’s say a couple is aiming to buy a $200,000 house three years from now. Twenty percent would be $40,000 over 36 months, $1111 a month or about $275 a week. The goal might say: WE WILL SAVE $275 PER WEEK FOR THREE YEARS TO BUY OUR FIRST HOME.

An Account of Its Own

It can be an excellent idea to have a separate goal-specific savings account, according to Mark Johnson, assistant professor of finance at Loyola University in Baltimore who does research in behavioral finance. “It makes sense to have separate savings accounts under two conditions: if it helps you reach your goal and you’re able to regularly monitor the accounts,” Johnson says.

“A separate account may even be preferred so that potential home buyers do not take their eyes off of the ball and lose sight of the goal of qualifying for a loan,” he notes. He acknowledges that a down payment can be a large sum of money and may take months or years to accumulate. “But,” he continues, “with goals, financial planning, and most importantly, discipline, this can be done.”

Cutting out the daily latte just doesn’t do it

For significant savings, it’s essential to review the monthly budget and really eyeball the largest expenses. One of the highest is usually rent.  Renting smaller, less desireable accommodations for a year or two is often a good way to save in that category.  Taking in a roomer could cut the cost substantially if your landlord allows it.

Some people move back in with their parents for a specified length of time with the goal of home ownership. Even if you don’t move in with family members, they can often help. The timing was perfect when a young couple (who prefer not to use their names) moved to Charlottesville with their new baby. His grandparents had bought a home in Charlottesville, but were delayed in selling their West Coast house.

“When we moved to Charlottesville in 2008, we used their house as a temporary landing zone,” he explains. “It allowed us to live minimally while we looked for jobs and accrued an employment history that banks would consider stable for financing approval.” When the grandparents finally arrived five months later, the couple moved into his older brother’s Lake Monticello basement apartment for three additional months until they were ultimately able to obtain a zero percent mortgage for a home in Lake Monticello.

Taking care of a property for a disabled or out-of-town landlord may yield free or substantially reduced lodging expenses in exchange for yard work, housework, or other services which can often be performed on weekends.

After rent, the largest expenses are typically car payments and transportation, utilities, food, clothing, health costs, and entertainment. These can’t be omitted, of course, but there may be ways to lower the costs.

For example, trading in large car payments for a smaller, older, but serviceable vehicle can provide a good boost to the budget. Auto insurance coverage and the cost of gas will probably be lower as well. Taking a bus, carpooling, or riding a bike to work, even one or two days a week, could also cut transportation expenses.

Reduce utility bills by raising the thermostat a couple degrees in summer and lowering it in winter. Pay attention to those recommended ecological tasks like changing furnace filters and weatherproofing windows.

To lower food costs, have beans and rice (literally) for dinner once a week. Go vegetarian several days a week, eat out only on very special occasions. Taking your lunch to work helps, too.

When it comes to clothing, wear an outfit one more year. Avoid clothes that require dry cleaning. Shop consignment stores or “thrift boutiques” operated by organizations such as the SPCA, JABA, or other agencies.

If you get a tax refund, deposit it directly into that special account. Same with at least half of any bonus or other unexpected cash windfall. Some people find it easier to have their employer make a direct deposit of part of their paycheck right into that special savings account.

Of course, there are other ways to cut costs. Adding up categories on debit and credit cards can be very revealing. Take a look at things like cable and cell phone bills, or restaurant charges. How much can you reduce them?

If you have credit card debt or are paying off a car, accelerate the payments if there is no pre-payment penalty. Stay at home for your vacation. Avoid shopping, even at sales. Keep your eye on the goal.

Finding Extra Income

Remember, money not spent is a form of tax-free income. Make family presents instead of purchasing them. Put up preserves, make pickles, gift a friend with a homemade pie. Give a certificate for three hours of babysitting or yard work or a free carwash.

Explain to family and friends that this is a major goal for you. Tell them that birthday or holiday monetary gifts toward your home-buying efforts would be especially welcome. Gift cards to your favorite grocery store, gas station, or restaurant would also be well received.

Consider ways to boost income. Take a part-time extra job for a while, register with a temporary helping agency, turn a hobby into a profitable enterprise, be a dog sitter or a baby sitter or a tutor. Seek overtime at work.

In some cases, parents or even grandparents may be willing to help with a down payment. “You have to be very careful,” warns REALTOR® Guthrie. “There are certain underwriting regulations, so you must talk with your lender so you don’t get caught in red tape. Generally a gift letter must be written stating, ‘I’m giving you so much toward the purchase of a house and it does not need to be repaid.’ This is very, very important.”

Guthrie concludes that while coming up with a down payment can be a challenge, it can certainly be accomplished.  “A key to this is that you find a real estate agent you trust, a financial advisor you trust, and an attorney you trust and all of them have your best interests in mind.”

Marilyn Pribus and her husband live near Charlottesville in Albemarle County. They bought their first home with a VA loan requiring a one-dollar down payment.

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