Home and Family
Tips for Saving for Your Down Payment
Before you can make the transition from renting your home to owning your home, you will need a substantial down payment, typically 5 to 20 percent of the home’s value. The American Bankers Association suggests the following tips to help save for it:
Develop a budget & timeline.
Start by determining how much you’ll need for a down payment. Create a budget and calculate how much you can realistically save each month – that will help you gauge when you’ll be ready to transition from renter to homeowner.
Establish a separate savings account.
Set up a separate savings account exclusively for your down payment and make your monthly contributions automatic. By keeping this money separate, you’ll be less likely to tap into it when you’re tight on cash.
Shop around to reduce major monthly expenses.
It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, Internet or cell phone plan. There may be deals or promotions available that allow you to save hundreds of dollars by adjusting your contracts.
Monitor your spending.
With online banking, keeping an eye on your spending is easier than ever. Track where most of your discretionary income is going. Identify areas where you could cut back (e.g. nice meals out, vacations, etc.) and instead put that money into savings.
Look into state and local home-buying programs.
Many states, counties and local governments operate programs for first-time homebuyers. Some programs offer housing discounts, while others provide down payment loans or grants.
Celebrate savings milestones.
Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000 total, consider treating yourself to a nice meal every $5,000 saved. This will help you stay motivated throughout the process.
5 Important Questions When Choosing Your 1st Home
You have made the decision that now is the time to find your own home, -- you are exhilarated and concerned at the same time. Explore the steps you need to consider with these suggestions from the American Bankers Association when choosing your own home.
How much money do you have saved up?Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically 5 to 20 percent of the price of the home. Security deposits on rentals are usually about one month of rent and more if you have a pet. But be sure to keep enough in savings for an emergency fund. It’s a good idea to have three to six months of living expenses to cover unexpected costs.
How much debt do you have?Consider all of your current and expected financial obligations like your car payment and insurance, credit card debt and student loans. Make sure you will be able to make all the payments in addition to the cost of your new home. Aim to keep total rent or mortgage payments plus utilities to less than 25 to 30 percent of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most loans to 43 percent.
What is your credit score?A high credit score indicates strong creditworthiness. Both renters and homebuyers can expect to have their credit history examined. A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to delay moving into a new home and take steps to raise your score. For tips on improving your credit score, visit aba.com/consumers.
Have you factored in all the costs?Create a hypothetical budget for your new home. Find the average cost of utilities in your area, factor in gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup. Consider the cost of yard maintenance and other basic maintenance costs like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes, mortgage insurance and possibly a home owner association fee. Renters should consider the cost of rental insurance.
How long will you stay?Generally, the longer you plan to live someplace, the more it makes sense to buy. Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs. Carefully consider your current life and work situation and think about how long you want to stay in your new home.
Getting a Loan and Choosing a Lender: What You Need to Know
Preparation is key to navigating today’s housing market. As part of American Housing Month, ABA offers the following tips to help prepare potential homebuyers.
Know your own financial situation.
Before you begin the home loan application process, determine what you can realistically afford. Take into consideration your credit score, how much debt you currently carry and what type of down payment you are prepared to make.
Have your documents ready.
While each bank may require different documentation, you may be required to furnish the following information depending on your employment and financial situation:
- Pay stubs;
- Tax returns;
- Financial statements (one that is less than 60 days old);
- Copies of additional monthly payments such as car loans, credit cards, and student loans; and
- Any other information (such as proof of additional income) that you think will help your banker to positively evaluate your credit request positively.
Review the basics.
Knowing the fundamentals of the home loan process is an excellent way to prepare to choose the right mortgage. Make sure you are familiar with interest rates, loan terms and additional fees associated with buying a home.
Beyond the interest rates, there are closing fees and points and commissions. You will want to compare these for all the lenders on your list. There are several calculators available online that will help you determine which loan provides the best value, including these from ABA (http://www.aba.com/aba/static/calculators.htm).
Choose a trusted lender.
Get references from family and friends and do your research. Call your local Better Business Bureau and ask if it has had complaints about any of the lenders you are considering. Keep in mind, federally insured banks are required to operate under a high level of regulatory supervision. A fully regulated bank may be your best choice.
Read between the lines.
Slick TV ads, telemarketers or door-to-door salespeople will often offer fast, easy loans for houses, cars and home repair, but not disclose all of the details. Read the fine print. If it sounds too good to be true, it probably is.
When in doubt, ask for clarification from your lender. Discuss how long the loan process will take, how you will communicate – by phone or email, and who will service your loan.
Questions? Please contact Consumers@aba.com for more information.
Coping with Debt
If you are a homeowner experiencing difficulty keeping up with your mortgage payments, it can leave you feeling vulnerable. Being proactive and educating yourself on the different options to prevent foreclosure will make the process less stressful, help you make educated decisions, and get access to the resources you need to keep your home. Here are a few basic tips that can help you prevent foreclosure:
COMMUNICATE: If you are starting to have financial difficulties and having a hard time paying your mortgage, make sure you contact your lender and respond to any correspondence you may receive from them.
READ: Look for your loan documents and understand what your mortgage rights are if you can’t make payments to your lender.
SPEND LESS: If you want to keep your home you will have to review your finances and figure out what areas of spending need to be cut or reduced and applied to your mortgage. Example of areas you might be able to trim include cable and eating out frequently until you are back on track with your mortgage.
AVOID FOR-PROFIT FORECLOSURE PREVENTION COMPANIES: These for-profit organizations claim to help you keep your home but will charge you huge fees that can be used towards a mortgage payment instead. Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Most reputable credit counselors are non-profits and offer services through local offices, online, or on the phone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.
But be aware that “non-profit” status doesn’t guarantee that services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which they may hide, or urge their clients to make "voluntary" contributions that can cause more debt.