With home prices rising but wage growth at a standstill for the past few years, saving up a down payment for a home has become seemingly impossible for many.
The best case scenario is to save up a 20% down payment. Doing so will earn you the best loan terms. The problem is, because wages are not rising but the cost of living is, that could take an average buyer 15 or 20 years to do, so it’s really not an option for a lot of folks.
The good news is that first timers, defined as anyone who hasn’t owned a home in the past three years, can buy a home for as little as 3% down payment through FHA, Fannie or Freddie, but you will need to pay mortgage insurance, which of course adds to your monthly housing cost (That’s insurance provided to the lender for taking the risk of loaning you money with such a small down payment which most folks agree increases the chances that you will default).
But even 3%, plus closing costs, moving costs, and maybe even some repairs that have to be made right away, can be a tough nut to crack. As a result, even though fort time buyers have historically been about 40% of the market, during the past few years, about a quarter of those buyers are “MIA.”
There are four basic approaches to saving up that money:
- The first involves looking for places you can find it by cutting back on other expenses. For example, one young woman who emailed me got together with her two closest friends and cut their eating out nights to once a month. The other nights they ate in each other's homes. After six months, each of them had saved enough money for a down payment. Most of us can save money on our insurance, cable or phone services and costs like that if we take the time to make it happen. Savings comes in little pieces for a lot of places.
- The second involves converting assets. That can be anything from liquidating some of the things you don’t really need or want by having a garage sale or selling them on E-Bay to converting retirement funds you’re allowed to use without penalty to buy a home.
- Then there’s identifying new sources of revenue. One young man recently told me he's a lawyer by day but took at part time job at a doggie day care on weekends. The extra income enabled him to save a down payment and he was able to fulfill his love of dogs without having to take on the cost and responsibility of owning one right now.
- Going to third parties is also a common solution. Over half of younger first time buyers ask family for help. But if your family can't help or you want to do it on your own, inquiring about state of local housing authority or similar down payment assistance for first time buyers is a growing option. There are literally thousands of programs like that which offer everything from; Below market interest rate loans; to Grants you repay when you sell or refinance; to Closing cost assistance. There are Realtors who are actually trained in some of these programs that can help you.
Clearly saving a down payment and buying a home is something that requires planning. Setting up a separate account so you are not tempted to dip into your down payment savings for other purposes and can easily monitor your progress is a big help. It’s also important to get a very clear picture of how much you can and want to spend on a home and how much you will need to save including the down payment and other costs. And if you plan to use any of the alternative source of funds besides your own savings, check to be sure that the source of funds for your down payment is approved by your lender.
Saving a down payment is difficult but it’s not impossible and it helps to establish some good financial habits and awareness that will be helpful once you own the home.