Saving for a home
Saving enough for a down payment doesn't happen overnight. But with a little guidance and planning, you may be picking out curtains sooner than you think. Here's what you need to know about saving money for your down payment.
What's a down payment?
Your down payment is a one-time cash payment you provide at the closing of the sale. The amount of your down payment determines your monthly mortgage payment and your initial home equity. How much you should save depends on a number of factors.
How much should I save for my down payment?
Generally, it’s considered a good idea to put down 20 percent or more when buying a new home. For example, if your home costs $200,000, you should aim to have $40,000 saved for a down payment. This way, you’ll avoid private mortgage insurance (PMI), which can cost hundreds of dollars a month for low-equity homeowners.
What if I can't afford 20 percent down?
Don’t drain your savings to cobble together a down payment. Options are available. At the bare minimum for a first-time homebuyer, your down payment must be 3.5 percent, which is the requirement to obtain a Federal Housing Administration (FHA) loan. Many experts agree they’d prefer a mortgage insurance payment any day to not having money for rainy days.
Tips for Saving
Tip: Automate a savings plan
When you have a general idea of your price range, it’s time to start setting money aside. A common practice is to save either a fixed amount or a percentage of each paycheck automatically into a certificate, savings, or money market account.
Tip: Create a budget and slash expenses
It’s an oldie but a goodie. Create an exacting budget and stick to it. Then start eliminating monthly costs that add up. Cut the cable. Cancel the memberships. Eat out less and plan meals and grocery shopping trips—all standard stuff.
Tip: Buying your first home? Listen up!
First-time homebuyers have the option of withdrawing up to $10,000 from an IRA without penalty to purchase a home. If you’re married, that could mean as much as $20,000 toward a down payment, since both spouses can contribute. However, you’ll have to pay the income tax on the withdrawal (except with Roth IRAs).
It should be noted that seeding your savings with this strategy could have serious, long-term consequences on your retirement plans.
Once a year, Solarity hosts a free Home Buying 101 seminar to education first-time homeowners on the complete process. You can also use this first-time home buyer checklist to help you plan.
Borrowing for a home
Nobody plops down a briefcase loaded with cash to buy a house—nobody we know, at least. That's why the mortgage was invented. But did you know that 75 percent of first-time homebuyers admit they never truly understood all the details of their mortgage before signing a mountain of paperwork? Let's not let that happen to you.
What's a mortgage?
Easy, right? It’s a loan for your house. Well, not quite. While most people think of a mortgage as the money you borrow to buy a home, that’s technically not correct. A mortgage is a document you give a lender that essentially says the lender has the right to use your home as collateral in the event you don’t repay the loan. As such, once the loan is paid in full, the mortgage vanishes, and you own your home outright.
Securing a mortgage can seem complicated because of the number of people involved. Each person you’ll work with provides a specific service that will help you become a homeowner. Let’s review them now.
Mortgage Loan Officer: An MLO for short, these experts will guide you through the entire loan process. They will also work with you to evaluate your needs and apply for a mortgage that aligns with your financial capacity.
Real Estate Agent: Real estate agents help you find the home you seek within your budget, examine comparable homes, and compare different neighborhoods. Agents often also present your offer to the seller and can handle negotiations for you.
Loan Processor: The loan processor prepares your mortgage loan information and application for presentation to the underwriter. The loan processor will ask you for many documents, including information regarding your income, your job, your monthly bills, and how much you currently have in the bank.
Mortgage Underwriter: The mortgage underwriter is the final assessor of your eligibility for the mortgage loan. The underwriter will approve or reject your application based on your credit history, assets, debts and other factors.
Appraiser: The real estate appraiser’s job is to look at the property you are purchasing and determine how much it’s worth.
Home Inspector: An authorized home inspector is usually hired by a purchasing party to ensure your potential new home is in good condition.
Closing Representative: A closing rep oversees and coordinates the closing, records the closing documents and disperses any money to the appropriate individuals.
What's the difference between lenders?
Every loan officer works as one of the following: mortgage loan officer, mortgage broker, or correspondent lender.
Brokers and correspondent lenders are not affiliated with any one financial institution and act as intermediaries between you and a variety of potential lenders (credit unions, banks, trust companies, etc.). A Mortgage Loan Officer offers you mortgages available through the particular lender where they work.
Whereas brokers and correspondent lenders have access to many lenders and tend to be more agile throughout the process, they won’t have access to lending programs specific to banks or credit unions that could result in a considerably reduced rate.
Mortgage Loan Officers, however, provide a more consistent service, as they are larger, more stable institutions and are already familiar with your financial situation. In fact, according to The Consumer Finance Protection Bureau, nearly half (47 percent) of all mortgages are issued through Mortgage Loan Officers.
How long will the closing process take?
Mortgage approval is a multi-step process and the more potential buyers can do from the beginning, the quicker everything can progress. Typically, a week is average for the underwriting approval, and about 18 to 22 business days from the start of the process to issuing a commitment letter. It’s recommended to let a lender pre-qualify you, giving your lender at least 72 hours to pre-approve. To make the process go more smoothly, look into your credit reports, bank statements and outstanding debts before you start shopping for a loan so nothing catches you off guard.
Recently, new federally insured disclosure laws have come into effect, making it easier for you to understand rate and fee quotes from lenders. However, they will also slow down your home-buying process. Ask your lender about their process for the TRID rules and have them clarify timelines for your real estate agency before you write any offers.
Tips for Borrowing
Tip: Understanding pre-qualification
To put it simply, pre-qualification occurs when your lender examines your financial history to provide you with a ballpark estimate of what you can afford. Not only do you gain a true sense of your budget, but pre-qualification also shows potential sellers that you are serious about buying their home.
Tip: Fixed vs. adjustable rate
OK, settle in for this one. One important choice regarding your mortgage is whether to go with a fixed-rate or an adjustable-rate loan.
A fixed-rate mortgage, as it sounds, has the same interest rate and payment amount for the entire repayment term. Due to its predictability, this is considered the best option for people who plan to stay in a home (and keep the same mortgage) for many years to come.
The adjustable-rate mortgage loans (ARMs) have an interest rate that will change at pre-determined intervals, over the life of the loan. Most ARM loans have a fixed rate for the first few years, after which the rate begins adjusting (hybrid ARM).
Tip: Government-insured vs. conventional
Conventional loans come in a variety of sizes and terms and may feature either fixed or adjustable rates. The federal government does not insure conventional loans and, in the event the borrower defaults on the mortgage, the lender is left with the house.
Government-backed loans are insured, either partially or completely, by the federal government. The government does not lend the money; instead, it promises to repay some or all of the money to the lender in the event the borrower defaults.
There are three common government-backed loans: FHA, VA and USDA/RHS.
- FHA Loans: The Federal Housing Administration (FHA) mortgage insurance program is available to all types of buyers, not just first-time buyers. The principal advantage is that the program allows you to make a down payment as low as 3.5 percent of the purchase price. The drawback, however, is that you’ll need to pay for mortgage insurance, which will increase your monthly payments.
- VA Loans: The US Department of Veterans Affairs (VA) offers a loan program to military service members and their families. The huge advantage is that borrowers can skip the down payment and receive 100 percent financing for the purchase of a home.
- USDA/RHS: The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS) and is offered to rural residents who have a steady, low or modest income and yet are unable to obtain adequate housing through conventional financing means.
Protecting your home
Your home is likely the biggest investment you'll ever make and your safe haven from the world. Let's protect it with homeowners insurance so the next time disaster strikes, you'll have to take care of the cleanup but you won't be financially devastated.
What's a standard policy?
A standard homeowners policy (HO-3 policy) will protect you in the event of fires, theft, accidents, or other disasters (flood and earthquake coverage requires additional coverage). Homeowners are often required by their lender to carry a standard policy to protect the mortgage company’s investment. It’s important to note that a standard policy is not a blank check—there’s a limit to how much you’ll be compensated.
How much coverage do I need?
You can calculate a rough estimate of what it would cost to rebuild your home by using the following equation:
Local building costs per square foot x total square footage of your home = cost to rebuild.
Typically, you have three levels of coverage to choose from when deciding how much home insurance you need.
- Actual Cash Value: Covers the cost to replace damaged property while factoring in depreciation.
- Replacement Cost: Pays the cost to replace damaged property without factoring in depreciation. However, payment is limited to a maximum dollar amount.
- Guaranteed Replacement Cost: Pays the full cost of replacing damaged property, without factoring in depreciation and without a dollar limit.
It’s a little confusing, we admit. If you’d like to discuss our Homeowners insurance policies, contact us today.
All information on this page is intended to be a helpful resource when researching, but does not constitute financial advice and should not be relied upon as such.