Do you dream of owning your own home? If you do, then you’re probably focused on figuring out how much money you’ll need to save for a down payment and where to begin.
At Addition Financial, we work with first-time homebuyers all the time. It’s one of our favorite things to do because we know how important homeownership is and we want our members to experience the thrill of having a place to call their own.
Many of our members ask us how to save for a house. They have questions about budgeting, saving, and how much they need for a down payment. We asked some financial experts for their advice and here are five tips they shared with us.
#1: Save a Minimum of 3% for a Down Payment
One of the most common questions we hear at Addition Financial is about how much to save for a down payment on a home. We most often hear this question from first-time homebuyers.
Jeremy Gamble, the CFO of SimpleShowing and a licensed real estate agent, had this to say about saving for a down payment:
“First-time homebuyers should expect to pay 2% in closing costs and at least 3% for a down payment. To offset the money needed upfront, homebuyers can negotiate their closing costs with the seller by asking for closing cost credits. In addition, some real estate brokers offer homebuyer refunds or rebates that can also help offset the upfront costs.”
To put this in perspective, if you bought a $200,000 home, you would need to put down a deposit of $6,000 and expect to pay $4,000 in closing costs. For a $500,000 home, the minimum deposit would be $15,000 and closing costs would be around $10,000.
Of course, many buyers choose to put down a larger deposit to minimize the amount of their mortgage and reduce their payments. In fact, the average deposit on a home is 6% of the purchase price.
#2: Budgeting is the Best Way to Save
We always suggest budgeting to our Addition Financial members, regardless of how much money they earn or what their financial goals are. That’s because we understand that a budget is the single best tool you can use to improve your financial health.
Anybody who is trying to save for a home should have a household budget that minimizes spending and maximizes saving. Here are some budgeting tips from David Bakke of DollarSanity, who says that first-time homebuyers should “budget ‘til it hurts.” His specific tips are:
- Use a free budgeting app like Mint
- Use internet research to find ways to save on everything from groceries to utilities to your smartphone
- Avoid big discretionary purchases such as taking a lavish vacation or upgrading your iPhone.
- Redirect the monthly surplus you create through cost-cutting and redirect it to a bank account that’s earmarked for your down payment and closing costs.
- Put any “free money” that comes your way – such as a tax refund check, bonus or cash gift from your birthday or the holidays – toward your down payment as well.
These tips might seem like a lot when taken all together, but we agree that this is the quickest way to save for a down payment. The money will add up quickly if you stick to your budget and you’ll be ready to buy a new home in no time.
#3: Don’t Forget About Closing Costs
When first-time homebuyers start searching for houses, they sometimes focus only on the down payment and not on the related costs associated with buying a home. You should expect your closing costs to be between 2% and 3% of the purchase price.
One of our experts, Benjamin Ross of My Active Agent, has this to say about closing costs:
“To minimize or eliminate your closing costs, include them in the loan. How we accomplish this is by asking the sellers to pay for your closing costs. If they accept, problem solved; if they refuse to, ask them to pay for the closing costs anyway [by] increasing the sales price by the dollar amount of your closing costs. As long as the property appraises for that amount (and it usually does), the closing costs become a part of your loan, and it costs the seller nothing. Your monthly payment barely goes up, and you save about 3% of your sales price. This money can go toward other things like moving costs.”
This strategy is one we recommend because it means you won’t need to save an additional 3% of your purchase price. If you don’t like this option, then we suggest using the “extreme savings” measures we described above to accrue enough money to pay for your down payment and closing costs.
#4: Research Homebuyer Assistance Programs in Your Area
A lot of first-time homebuyers don’t know that there are assistance programs that can help them cover the costs of buying a home.
Gamble says:
“Fannie Mae offers a HomeReady loan to first-time homebuyers that requires a down payment as low as 3%. In addition, VA loans and FHA loans are common 0% to low-rate mortgage options.”
Bakke adds:
“Fannie Mae also offers what's called the HomePath Ready Buyer program which can give you as much as 3% of the purchase price of the home, provided you qualify.”
Fannie Mae isn’t the only option if you need down payment assistance. Here are some other options that we recommend to our members:
- The Florida Housing Finance Corporation, or FHFC, has two down payment assistance programs. The first is FL Assist, which financial expert Chris McDermott of Jax Nurses Buy Houses mentioned. It provides as much as $7,500 in down payment assistance in the form of a 0% deferred second mortgage. That means you’ll pay it back only when you sell your home. The second is a 3% Housing Finance Agency preferred grant, which offers qualified recipients enough to cover a down payment on a home. It’s a grant, which means you won’t need to repay it. You can read about both options here.
- The National Homebuyers Fund has a grant program that provides up to 5% of your loan amount to use as a down payment. As a grant, it does not need to be repaid. Read about it here.
- Addition Financial works in partnership with FHLBank Atlanta to offer our First-Time Homebuyer Mortgage, which requires only 3% as a down payment. There are some requirements, including attendance at a financial literacy class for homebuyers. You can read it about it or apply here.
Just a little bit of research can help you afford a home even if you don’t have enough money for a large down payment. Read more about down payment assistance programs here.
#5: Pay Down Your Existing Debt
Another tip we got from McDermott is to pay down or refinance your existing debt before applying for a mortgage:
“Given the recent change in rates with Fed Cuts, I would recommend any potential homebuyer refinance any debt to accelerate pay down of the debt enabling them to save more for a down payment, reserves, and closing costs.”
Let’s take each issue separately. Refinancing your debt – for example, consolidating your existing credit card debt onto a new card with a low interest rate – can save you money on your monthly payments as well as saving on interest in the long-term. The key is to do your research and find a card that offers favorable rates. You can find our guide about how to choose a debt consolidation credit card here.
Paying down your debt can help you in several ways. It can:
- Improve your credit score to make it easier to qualify for a mortgage
- Save you money on interest in the long-term
- Once your debt is paid, you’ll have additional money in your monthly budget
If you have credit card debt, you can review our list of ways to pay it off here and choose the one that works best for you.
#6: Speak with a Lender
Our final tip comes from Eric Jeanette of Dream Home Financing and FHA Lenders. He says:
“Everyone's situation is different which is why it is critical for first-time homebuyers to speak with a lender long before they decide to start looking for a home or even saving for the down payment. There could be something about their employment or credit situation which may exclude them from participating in one of the low down payment mortgage programs. Knowing this in advance would give them time to make possible adjustments.”
At Addition Financial, we love it when our members come to us to ask questions about the homebuying process. We recognize that everybody’s situation is different. What works for one person may not be the best option for another.
It’s never a bad idea to sit down with an expert and ask questions. We know a lot of first-time homebuyers who are nervous about approaching a lender. We never want our members to feel wary of talking to us. It’s our job to help you navigate your finances. We can help you figure out how much you need to save – and what assistance you can get.
Saving for a down payment on a home can feel overwhelming, but the key is to take an informed and methodical approach to the process. There is help available – and we are here to provide it.
Are you in the market for a new home? Click here to read about Addition Financial’s flexible mortgage options.
Posted on Apr 11, 2020
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