Start Your Downpayment Fund Now
By Phillip B. Burum
Mid-summer is upon us and the holiday season may seem a world away but, for new homebuyers, the space between now and the holidays should be used for long term financial planning. If you have made the decision to buy a new home and you have taken the necessary steps to clean up your credit, your next step will be to start a down-payment fund. The holidays can provide an opportunity for close friends and family members to help with that extremely daunting task.
Among the most important components of purchasing a home could be to amass the largest downpayment possible. A large downpayment equates to a reduced mortgage amount and often enable lenders to offer lower interest rates on the mortgage balance, both result in lower monthly payments for the buyer.
So, the months between now and the holiday season provide a great opportunity to begin informing family members and friends that you’ll be shopping for a home and gifts of cash for your downpayment fund will provide a great alternative to conventional holiday gifts. Don’t be shy with this suggestion and don’t underestimate the desire of others to make a valuable contribution to your lifestyle. Most would rather know they helped you get into a home than gift you a new set of luggage or some other trivial gift that will be appreciated only briefly or in very specific circumstances.
If any of the gifts will be significant, remember to ask the donor for a ‘gift letter’ indicating that both parties consider the donation a gift. Lenders will be looking at several months’ worth of bank statements and any deviations from the norm will need to be explained. Having the letter in hand when any questions regarding unusual deposits are asked will save you time and inconvenience later when finalizing your paperwork.
Building a down payment fund will take some personal discipline, limiting the amount of dinners out every week or even deferring your annual vacation until the following year. If you are shopping for a new home, it is probably not the best time to buy that shiny new sports car. A bit of disciplined monthly budgeting combined with some generous family benefactors and you may be there sooner than you think.
Consider attending a first-time home buying seminar or consult with a credit counselor who does not work for a lender, so you can research your options without being influenced by someone who has a financial interest in the home or loan you choose. One of the best resources for this is the U.S. Department of Housing and Urban Development (HUD)’s www.HUD.gov website which offers free housing counseling and seminars.
How do I determine how much I need to save? Typically, lenders will require a down payment ranging between five and twenty percent of the home’s value. When developing your budget for a down payment fund, factor in common additional expenses that are part of the homebuying process, such as home inspection fees, title fees, broker and escrow fees. Transactional costs can easily cost four to six percent of the purchase price, so go into this transaction with your eyes wide open and educate yourself on the cost associated with the sale.
As you begin to develop your new home purchase ‘war chest,’ remain cognizant of your original financial goals for monthly payment and only buy what you can afford long term. If you happen to save more than the lender requires for a down payment, that does not necessarily mean that you should be looking for a more expensive home. Placing a larger-than-required down payment is a good thing. It will mean a more attractive loan proposal and a lower monthly payment.
The most important part of this process was your decision to buy a new home. Now that that decision has been made, it’s time to develop a budget and a plan. Success is never guaranteed with any plan but, if you take the time to be honest about what you want and what you can afford, write it down [including a timeline] and take steps to meet those goals, your chances of success and happiness with your purchase increase exponentially.
The Building Industry Association (BIA) Baldy View Chapter seeks to advance the opportunity to attain the American Dream of homeownership. For more information, visit www.biabuild.com on the web.