By Emily Merkley association executive,
Cache Valley Association of Realtor
NAVIGATING A REAL ESTATE market that is in constant flux can be daunting. Distinguishing fact from fiction becomes a challenge with friends, family, neighbors, and numerous online sources offering “advice.” The financial facet of real estate, including loans, down payments, mortgage insurance, and interest rates is a huge area of concern and confusion for potential home buyers. The overabundance of information (accurate or otherwise) creates a stumbling block for potential homeowners.
It’s often this type of misinformation that keeps potential home buyers from taking the steps to owning their own homes. For example, roughly 62% of American first time homebuyers still believe they need a 20% down payment to purchase a home. With ever-increasing rent costs, putting away enough money for a huge down payment may not seem plausible. But the truth is that 32% of US homeowners put down 5% or less for a down payment. This difference makes homeownership a reality for many more individuals.
Understanding the purpose of a down payment helps clarify why 20% is not a hard and fast rule. Buyers should put down as much as they can afford, because the more that is put down, the less that is borrowed. However, there are other down payment options that should be considered. Some loans offer low-down-payment mortgages, state and local down payment assistance programs are offered through governments, nonprofit organizations and employers, and certain mortgage-banking firms offer crowdfunding tools and sites to help first-time, pre-qualified buyers accumulate money for a down payment.
To know what options are available to you, contact a REALTOR® who will help you determine the best fit for your specific needs and circumstance. They have experience and expertise to help with details that may not be easily understood. A REALTOR® will determine your cost range for a home, map out financial possibilities and parameters, find a home that fits your needs, and identify loan options that meet your financial goals. Your dream of owning a home may be more of a reality than you think!
The Simple 5-Step Process to Save for a Down Payment
It may feel impossible to find any extra money at the end of the month, but with a plan to reach your goal of saving for a down payment, you will be well on your way to owning a home.
STEP ONE | Determine how much you’ll need to save for your mortgage. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for. Identify loan programs that fit your financial goals and assess their down payment requirements. That’s your target.
A) How long do you need to save what you need? If you really budget and focus on saving, you can plan to take two to three years.
B) Where should you put the money you are saving? A simple money market savings account will do the job. You won’t make a lot of interest, but you won’t run the risk of losing money.
STEP TWO | Set a time frame. If you plan to purchase a home in five years or less, divide your down payment requirement by 60 months. Naturally, the shorter your timeframe, the higher your monthly savings goal will be.
STEP THREE | Cut expenses in existing budget. You’ll need to clear some room in your budget to make sure your savings goal is doable. Cutting back on unnecessary expenses is one way to do it. Doing so will also help prepare you for managing the type of tighter budget that homeownership requires. Embrace it!
STEP FOUR | Set up an automated savings plan. Just like your 401(K), you should allocate a certain dollar amount or percentage of your regular pay to go directly into a savings account dedicated to accumulating down payment funds. Not just automatic, but it also makes this process invisible, removing the temptation and ability to spend on other items.