HGTV portrays homebuying as a whirlwind of open houses and comparisons of floor plans and kitchen fixtures. But before you can make an offer on your dream home (or even your starter home), you’ll need a down payment, a detail that’s rarely discussed on “House Hunters” and the like.
At a time when nearly half (44 percent) of Americans say they can’t come up with $400 to cover an emergency expense, saving up thousands of dollars for a down payment is no easy task for most people.
Here’s what several homebuyers wish they’d know about saving up for a home.
1. Start saving well before you want to buy a home.
If you’re happily renting, then homeownership may feel like a distant or unattainable dream. But as Melanie Fortin, a Connecticut homeowner and mother of three, discovered, there may come a time when you want to set down roots and buy a home. She admits that she and her husband didn’t plan for this possibility, but with two of their kids starting school a few years ago, they decided to settle down, and borrowed down payment money from her father. “If he hadn’t been there we wouldn’t have been able to buy a home,” she said.
Even with help, “our first home was far from being what we wanted but if we had saved more money, it would have probably been a nicer home,” she said. “If we had saved more for a longer period of time, we would have had more choices.”
2. Make short-term sacrifices for long-term gain.
Multimillionaire Tim Gurner has criticized millennials for prioritizing avocado toast and fancy coffee over home ownership, but Elizabeth Colegrove and her husband disprove Gurner’s statement. The millennial couple bought their first home in Virginia Beach after spending their first year of marriage sharing a rental house with a roommate to save money. “We had the back half and he had the bedroom in the front,” she said. Instead of upgrading rentals, Fortin wishes she and her husband stayed put in their starter apartment and saved the difference for their future down payment. Housing is the largest monthly expense for most people, so keeping housing costs low by living with parents or roommates or staying in a smaller place longer can save a lot more money than forgoing coffee and brunch.
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3. Understand PMI.
Most conventional home loans require private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchase price. Some buyers aim for 20 percent down so they don’t have to pay PMI every month. Colegrove and her husband managed to avoid PMI by taking out a loan guaranteed by the Department of Veterans Affairs (her husband is on active duty, so they qualified for one). However, first-time VA borrowers pay a lower funding fee, and future loans carry a higher funding fee. Colegrove wishes they’d gone with a conventional loan instead so they could have enjoyed the lower funding fee on a more expensive home later on.
“Don’t go with the conventional wisdom because conventional wisdom may not work for you,” she said. “Everyone was like, ‘use your VA loan,’ but it was a very stupid decision at the time. Some people wish they hadn’t done PMI; we wish we had done PMI.” Make sure you understand your loan options and weigh the costs of PMI versus a higher down payment.
4. Document everything.
Whether you’re getting a down payment as a gift from family or cashing out your own investments, mortgage lenders want your down payment’s source carefully documented. When Andrew Norcross and his then-wife bought their first home together in Florida, their families gifted them around $10,000 toward a down payment. “We had to prove the fact that it was a gift and a voluntary gift,” he said. “Our families wrote a letter and we had it notarized that they had provided a gift for the reason of doing the down payment on the house.”
The couple also discovered that their mortgage lender wanted the money “seasoned” in his bank account rather than being transferred in at the last minute. “They preferred the money to be sitting in my account for 60 days,” he said. “We had to coordinate the transfer and wait.” Later, when he bought another home with money from a company he’d owned, he also had to provide detailed documentation of the funding source.
5. Plan for extra costs.
The minimum down payment for a loan insured by the Federal Housing Administration is 3.5 percent. Buyers taking out a conventional mortgage might aim for a 10 percent down payment to keep their monthly payments low, or 20 percent to avoid PMI. As long as you can scrape together 10 or 20 percent of the purchase price, you’re good to go, right? Not quite. Your down payment isn’t the only money you’ll need to bring to the closing table. You may also have to pay for an appraisal, lawyer fees and homeowners association dues as part of closing.
“When you finally buy your house, you realize all the costs that a down payment doesn’t even cover: Closing costs, furniture, moving, switching utilities,” Fortin said. “Then when you get there, you want to do a little bit of painting and fix up.” You can’t predict every expense, but plan to set aside additional money for closing costs and maintenance once you’re a homeowner.