One of the best investments you’ll ever make is buying a home, but this can be quite a feat if you are unable to save the amount of money required for the down payment. Saving for a down payment of a home is one of the most challenging tasks a young family faces in their quest for home ownership.  Creating a down payment savings plan will help potential buyers reach their goal of home ownership faster.

 Ideally, you should purchase a home and have enough accumulated for the down payment.  Twenty percent of the homes purchase price seems like a lot of money, but the amount due must be large enough to protect lenders from default.  If a lender is required to foreclose on a home they must pay a real estate commission, transfer tax, and other expenses of the sale so they have learned that buyers are far less likely to default on a home on which they pay 20 percent down.  They have also found that they are less likely to lose money on mortgages where the borrower has put up at least a down payment of 20 percent of the value of the property. 

The purchase of a home typically entails saving for three up-front costs.  The down payment is the largest part and is a percentage of the total purchase price of the house.  Down payment requirements have dropped considerably as the economy has improved and home prices have stabilized in recent years.  Most first time home buyers can purchase a home with no down payment, but putting down a small down payment of at least 3 percent will help get you a much better interest rate.

In addition to the down payment, funds are required to cover closing costs.  These costs include all fees required to execute the sales transaction, which includes attorney fees, appraisals, inspections, title insurance, points and tax escrows.  These charges will vary considerably and most homebuyers will need at least a few thousand dollars for closing costs.  Homebuyers also need to show that after paying the down payment and closing costs they will still have the needed funds to protect themselves against short-term cash flow issues. 

Borrowers can purchase a home with no down payment and in many cases they can also have the seller or lender finance the closing costs. With no closing costs or down payments, borrowers need only to show that they have the cash reserves.  It’s wise to have money set aside in case of an emergency, but borrowers might not need reserves for a loan program.  Future homebuyers can develop a savings plan that will likely help them achieve their dreams of owning a home.

 Before starting a savings plan, a future home buyer needs to determine their current financial position.  By reviewing all assets and liabilities, developing a budget, and planning how much to save every month they will be better able to determine how much money they will have available for mortgage payments.  When analyzing total current assets, the consumer should make all attempts to not overlook any source of funds.  This is the time to review all checking and savings accounts, CDs, stocks, mutual funds, and savings bonds.  Retirement funds including 401(k) or IRAs can be counted toward the payment reserve requirement.  Proceeds from borrowing against your retirement funds can be used toward a down payment. 

Those looking to own a home often look into renting a home with the option to buy as a method of saving a down payment.  The seller or landlord will credit a portion of the monthly rent toward the purchase price and the portion of the rental payment that exceeds the fair market rent can be applied to the down payment.  Few homeowners are willing to consider this type of transaction.  Typically, potential home buyers are better off staying where they are and saving on their own to purchase the home they really want. 

It’s easier to start saving if you have a specific goal in mind.  This is the time to discuss your budget and expectations and to determine how much you can afford to spend on monthly mortgage payments.  To reach your goals, you’ll need determination and discipline and of course, a budget.  It’s wise to track all of your expenses in detail for a month or two to help determine where your money is going and where you may need to cut back.  Cutting back on life’s little luxuries is well worth the sacrifice to get into the housing market.  Once you own your first home, you’ll be well on your way to building equity, enjoying the American dream, and increasing your net worth.

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