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Have You Saved Enough Money to Buy a Home?

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Do you have enough money for a down payment, for closing costs, and to have an emergency savings fund?

Typical mortgages will require you to have a down payment equal to at least 3% of the home’s purchase price. On the other hand, some specialty mortgage products (such as VA loans and Rural Development Loans) may not require any down payment at all. However, the more money you can put down on your new home, the better off you will be. A low down payment can lead to higher interest rates and requirements for you to have mortgage insurance. Each of these will significantly add to the long term cost of the home. The bottom line? On its own, not having a 20% down payment should not be a stumbling block to buying a home.

You will need more than just a down payment. When you buy your home, you will also need to pay closing costs. Closing costs represent the actual transactional costs of buying a home. Those costs can include loan application fees, taxes, title searches, home inspections, and more.  It is important to understand that closing costs represent actual costs and are not based upon a percentage of the home’s selling price. Closing costs do not have to be covered by the homebuyer. You can negotiate to see if the seller will pay all or a portion of the closing costs. Your lender may also be willing to roll the closing costs into the loan.

You should also have money set aside for an emergency savings fund. It’s pretty rare these days for a lender to require that you have some kind of cash reserves. However, as a homeowner, you will need cash that will allow you to make repairs to the home as they become necessary. When a storm blows a branch through a window or your hot water heater goes out, you are the one that will need to make repairs and replace equipment.

What can you do when you haven’t saved enough money to buy a home?

Recent polls have shown that saving up for a down payment is the largest hurdle for first time homebuyers. Many people don’t understand closing costs or the need to have an emergency savings account. If you are struggling to save the cash required, we might be able to help. The HomeOwnership Center has Down Payment Assistance programs and Financial Fitness classes that can make a real difference to you.

This is the second post in the series, Are You Ready to Buy Your Own Home? You can read the other installments in the series by following these links:

Part One: Is Your Credit History Good Enough to Buy a Home?
Part Two: Have You Saved Enough Money to Buy a Home?
Part Three: Are You Mortgage Ready?
Part Four: Are You Planning to Stay in the Home for the Next 5 to 7 Years?
Part Five: Are You a Realistic Homebuyer?
Part Six: Do You Know Enough About the Homebuying Process?

Do You Really Need a 20% Down Payment to Buy a Home?

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Conventional wisdom says that you need a 15 or 20 percent down payment to buy a home; otherwise you won’t be approved for a mortgage.  That may have been true twenty years ago, but times have changed and so have the down payment requirements for buying a home. If the hurdle of saving for a big down payment has been keeping you from buying a home of your own, read on and you may find that homeownership is within your reach.

If you don’t need a 20% down payment, how much money should you have? You could get a conventional loan with as little as 3% down. FHA loans are also available with a 3.5% down payment. There are even some specialty programs like VA loans and Rural Development loans from the USDA that don’t require a down payment at all. The take away is that you can buy a home with a much smaller down payment than you might have thought.

For those of you that are paying high rents or student loans, coming up with any down payment at all might be a real struggle. To meet your needs, down payment assistance programs are available in much of the greater Dayton area. These programs do have income limits, but will require you to come out of pocket with very little money of your own.

What about closing costs?

Closing costs are the amount of cash that you will need to pay for closing expenses such as loan processing,  the land surveyor, deed recording, etc. Typical closing costs run in the 2-5% range and are not a set percentage, but the actual cost of the various fees. Unlike the down payment, closing costs don’t have to come from you. You could ask for a credit towards closing costs from the seller or get a cash gift from family or friends. You may even be able to add the closing costs into the mortgage.

Don’t let the lack of a down payment become a barrier to buying a home.

The 20% down payment requirement is the biggest homebuying misconception that we hear at the Home Ownership Center. It’s simply not true. If you have questions about down payments or any other homebuying issues, give us a call at 937.853.1600 or fill out the following form. We are a non-profit resource dedicated to guiding you down the smart path to homeownership.