HANNA KIELAR / JANUARY 04, 2020
The first step to saving for an adequate down payment is determining your home buying budget. There are two key factors in figuring out how much home you can afford: your monthly payment and your down payment. It’s important to have a ballpark idea of this first, since the higher the down payment, the less you’ll need to pay each month in your mortgage, interest and mortgage insurance.
The ideal down payment is 20% of the home’s cost. Not only will that make your monthly payment substantially smaller, but it also means you typically won’t have to pay for mortgage insurance, depending on the type of loan you have. Of course, 20% can seem like a lofty goal, and there are many programs – particularly for first-time home buyers – that require a much smaller down payment. Talk to your mortgage provider about all your different options in order to find the program that’s right for your family and your financial situation.
If you are using gift money for your down payment, make sure you understand all the ins and outs, as the restrictions are many. But, if you’re planning to fund it yourself, it’s time to start saving. There are as many ways to save for a down payment as there are families. Here are a few ideas to help you get started on building up that nest egg to fund your future nest:
Make automatic transfers: If you’re just saving what’s left at the end of every month, you’re not likely to build up the amount you need with any speed. Instead, you should pay yourself first, and let’s face it … it’s a lot harder to spend money that’s not in your bank account. That’s why one of the easiest ways to save is to talk to your bank about automatically moving money from your checking account to a special “down payment” savings account so you never even see those funds. Chances are good you won’t even miss them.
Rework your budget: It’s pretty easy to spend all the money you make in any given month and not even know where it went since little expenditures can add up fast. That’s why having a budget can help keep you in check – if you’ve already spent the amount you had allocated for dining out, for example, then it’s off to the grocery store and home cooking for you. If you’re trying to save for a down payment for a home, you might want to take an even sharper pencil to your budget and figure out ways you can save all month long and then allocate those dollars to your down payment savings account. Watching the savings add up can be very motivating.
Remove a big ticket item: Sure, committing to brown-bagging your lunch and forgoing coffees and new shoes can help rack up the savings. But sometimes you need to take a step that’s even more drastic when you’re saving for a down payment for a home. You might decide to temporarily move to much smaller quarters to slash your housing expense, skip your annual vacation or commit to being a one-car family in order to save that big chunk from your car payment (or forgo a new one if you were in the market). Making a sizeable lifestyle change can help you boost your savings with a substantial amount each month and get you to your goal faster.
Remember the goal: Austerity isn’t much fun, but it can feel a lot less painful if you constantly remember why you are committing to this frugal lifestyle. Post pictures of your “dream home” around your current dwelling and workplace and change the screensaver on your computer and wallpaper on your smartphone. Every time you make a sacrifice to fund that down payment account, give yourself a pat on the back and remind yourself that it will all be worth it when you’re a bona fide home owner.
Once you’ve determined how much money you can realistically save for a down payment and have done some due diligence on home prices in your area, it’s time to seek a mortgage. Many home buyers wait until they’ve found their dream home, but that can be a mistake. That’s because finding out how much your mortgage lender is going to give you will dictate which houses you consider in the first place. After all, there’s no reason to look at homes that are outside your range. Conversely, you might find that you qualify for more money than you were expecting, depending on how interest rates fluctuate.
Besides setting budget parameters, having a Verified ApprovalSM will instantly set you apart as a serious home buyer and make your offer one that the seller will more strongly consider. That’s because a seller doesn’t want to go through the entire process only to find out the potential buyer doesn’t have the funds to close the deal. Having a mortgage preapproval means that you can go the distance, which will be valued by the seller – especially important should you encounter a multiple-bid situation, where you are competing with other buyers to provide the most attractive offer.
You’ve finalized your housing budget and have received your verified approval: Now comes the fun part – looking at houses (or condos, or townhomes or whatever configuration you determine fits your budget and lifestyle needs).
But the sheer amount and variety of homes for sale in most areas is vast – and therefore can seem overwhelming. A great place to start is to write down everything that’s important to you in a home and have your partner make a similar list.
Divide the various amenities and factors into categories of “nonnegotiable” and “important to have.” Remember these divisions might be fluid over time, but it’s important to have somewhere to start. Compare lists with your partner and have a conversation about the various items and your reasoning behind your rankings, then create a master list. That gives you the basis to start looking around and seeing where further compromises might need to be made. Remember, you might not be in the home forever, but it’s important to find one that checks as many boxes as you can, realizing that there may be tradeoffs.
In fact, once you start touring homes in earnest, it’s likely that you’ll need to compromise in some area – almost every home buyer does. You might decide that you absolutely need three bedrooms, but you’re willing to look at neighborhoods a little farther out than you had expected to achieve that. Or, your top criteria might be the school district, and therefore you might decide your family can make some sacrifices in terms of bedroom size in order to be in the neighborhood you want. The decisions are different for every family.
You may have started the process on your own, but having an agent can be an important part of the home buying journey. Even if the home you are looking at has an agent, remember that the “seller’s agent” is working for the seller so they have their best interest at heart when it comes to issues like price and terms, not yours.
What many first-time home buyers don’t realize is that retaining the services of an agent is essentially free for the home buyer. Yep! It’s true! That’s because the seller is the one who pays the agent commission based on whatever parameters the selling and buying agent work out. But as a buyer, you won’t have to contribute a penny out of your pocket for the exceptional service that an agent can offer.
Still not sure you need an agent? Don’t dismiss the idea without thinking it through. Even if you believe you can find your home looking solo, here are some of the services that an agent can perform, which can make the home buying process more streamlined and successful.
· Find homes that have appeared on the Multiple Listing Service before you do – and even sometimes homes that haven’t hit the market yet
· Help arrange open houses and home tours
· Offer neighborhood intelligence on up-and-coming areas, price insight and more
· Act as a third party to give unbiased advice
· Help you submit a strong offer· Negotiate with the seller on your behalf
· Oversee the inspection
· Help with the paperwork and closing
As you can see, real estate agents perform an extremely valuable service, which can make the experience a lot more pleasant as they draw on their experience and training.You may wonder how to find the ideal real estate agent. Start by asking around for referrals from friends or family or others in your network, or take a drive around your local area and peruse recent listings to find neighborhood specialists who seem to be in the know.Then make sure to interview several prospects before making your decision. You want to find out more about both their experience and processes, and verify you’re a good personality fit. Buying a home can be a stressful experience, so having someone with whom you click can make a big difference.
After you’ve shared your wish list with your real estate agent, it’s time to go take a look at what’s on the market that fits your criteria. Visiting a wide variety of properties can help you decide which items can shift on your list, if compromises need to be made. For example, you might decide that the shoebox you can afford in a coveted neighborhood isn’t going to work, and you can handle a longer commute in order to have a fenced yard and ample space. Or, you might realize that a fireplace in your bedroom or brand-new kitchen appliances are a dream that will have to be put on hold for the time being.
As you tour houses, remember to focus on the elements that you can’t change – such as its location and general layout – while assigning less importance to cosmetic upgrades or decor that you can change over time – even if that shag carpet or questionable flooring is particularly jarring.
The goal is to overlook the design flaws and concentrate on the “bones” of the house; that is, the major parts that can’t be fixed … or that will cost a fortune and cause major disruption if you need to. For example, here are some things to note as you tour the house:
· How much longer will the roof last?
· Are any of the floors sagging?
· Are there any strong odors?
· Are the electrical and plumbing systems up to date?
· Is the foundation slipping?
· Are there mold or mildew spots in the cupboards or on the ceiling?
· Are the trees healthy and located safely?
· Are the appliances and heating and AC systems in good working condition?
These are the factors of the house that are important to assess as they are the most difficult to fix. And, overall, you want to decide whether the home looks like it’s been taken care of. As you get further into the process, feel free to ask questions and request maintenance records, and don’t forgo a solid home inspection.
Since details of the homes you visit tend to all run together, take pictures of certain features to augment the “beauty shots” that might be part of the house listing and make notes directly after touring a home about what you liked and didn’t like so you’ll remember which house is which as you make decisions.
Once you’ve decided on “the one,” it’s time to make an offer. This is where a real estate agent can come in handy, because they have more knowledge of the market and can help make sure the offer is both solid and appealing. After all, buying a home can be a stressful process, and you don’t want to lose out on the perfect home because of a technicality. The official “offer” will likely include items such as:
· The price you’re offering· The time frame (as in, when you need to close)
· Your mortgage preapproval to show you’re serious
· Any contingencies, such whether you need to sell a property first, or if you are waiting for inspection results
· Your “earnest money” deposit, which shows you’re serious about your offer
Finally, the day you’ve waited for has arrived. The home is about to be yours! But, not so fast: There’s a lot of paperwork (and, of course, some money!) standing between you and your house, which you’ll take care of at the closing. Your agent will help you know what to bring, but in general, you are going to need your ID and various denominations of money. No, not just the down payment, but also fees to cover a wide variety of closing costs. These typically include:
· Loan origination fee· Appraisal fee· Credit report fee· Documentation prep fee
· Recording fee· Taxes· HOA fees· Title insurance
Each is composed of varying amounts, but your real estate agent and mortgage lender will walk you through what you need to know so there are no surprises at closing.
At the closing you’re going to write checks, sign documents and then finally collect the keys to your new home. And now, you can rejoice because the process is over. Congratulations! You are officially a home owner in 2020!
Ready to get started and make that dream a reality for you in 2020? Visit Rocket Mortgage® today to take the first steps on your home buying journey.