If you are in the market for buying a home, your first focus is likely on coming up with a down payment. Coming up with a sizable down payment quickly can be difficult, and often leads to questions of how much you really need to put down on a home. Although you might consider dipping into your retirement savings in order to come up with the funds, we generally don’t see this as the best approach in light of alternatives. There are ways to come up with a down payment, and do so without dipping into your nest egg.
Determine the percentage: How much do you need to put down on a house?
Traditionally, you are required to put down 20% for a conventional loan. However, depending on your situation, other options may exist. The FHA program provides mortgage insurance to banks, so lenders aren’t taking on the full risk of the loan. FHA loans are not just for first time home buyers, either. An FHA loan can allow you to put down as little as 3.5%, making the dream of owning your own home potentially much easier to achieve.
One of the main caveats for FHA loans is the added cost of PMI (Private Mortgage Insurance). Down payments less than 20% will require an additional monthly payment to your mortgage, called PMI, which helps protect against default. In 2015, if you put down at least 10%, PMI will stop after 11 years; however, if you put down less, you will be required to pay it for the duration of the loan.
Although FHA loans can be a terrific way to bridge the down payment gap, as always, work with your lender and financial advisor to determine how much your monthly payment will be. Not only can PMI easily add a few hundred dollars to your monthly mortgage payment, but there’s often a gap between the loan amount you qualify for and what your budget can reasonably withstand.
Check Special Loan Programs
There are a variety of local, state and federal programs that can help individuals with a down payment. Additionally, there are programs that are designed for people with specific occupations and income levels. Some lenders offer special programs for veterans or teachers, while others offer mortgages for doctors. For example, there are a handful of mortgage loan programs that cater specifically to practicing physicians or doctors that are still in residency. A central feature of these programs will allow doctors to put down as little as 5% with no PMI.
One of the most logical ways of coming up with a down payment is saving for it. While this may seem impossible at first, you may be surprised by how much you can save if you just revisit your budget. Make a spreadsheet of your monthly expenses for the last six months, and earmark any excess funds. For example, consider postponing your annual vacation or saving your tax refunds and bonus income.
Limit spending on your biggest expenses: housing and cars
While these larger amounts can certainly get you to your goal faster, with some couples only requiring a year to reach their goal, it may take others much longer. If this is the case, consider making bigger adjustments to your lifestyle. Start cooking at home, and going out to eat less. Try to save money on rent by either getting a roommate or moving into a cheaper neighborhood. If you live in a city that has excellent public transportation, revisit your need for a car, or two cars. An average car payment in 2015 is nearly $500; with the addition of insurance, excise taxes, parking, gas, and maintenance, you can be saving close to $1000 per month by going carless.
Get a gift for your down payment
If your family is willing to help with your down payment, a gift can be a great way to offset some of the cash you’ll need. With the right paperwork, including a donor letter, a gift could cover all or part of your down payment, depending on the type of loan. If this may be an option for you, work with your lender to ensure you can meet the requirements.
Whether you are a first time homebuyer, or are trying to upgrade from your existing property, coming up with a down payment without dipping into your nest egg can seem impossible. However, there are ways to purchase your dream home with a little research, planning, and guidance.
At Darrow, we understand saving for tomorrow is as important as investing for your future. Buying a home can be stressful, which is why clients have access to our network of lenders, real estate agents, and attorneys to help ensure the process is as smooth as possible. Whether you’re a physician coming out of residency, a first time homebuyer, or an investor looking to purchase an income property, contact us today to get started.