One of the bigger hurdles that home buyers face, especially first time home buyers, is coming up with the downpayment. According to a survey conducted by Zillow, this came out as the #1 obstacle for 2/3's of the renters surveyed. This particular obstacle even scored higher than other concerns such as home sale supply and job security.
As the price of homes increases, the downpayment expectations also grow. You will need money for a downpayment as well as closing costs. However, since this continues to be the American dream... to own a home, prospective home buyers work hard to make it happen.
If you are planning to make that first home purchase in the future, here are some tips to help you plan for your down payment.
1) No time better than the present - You will want to start saving now, if you haven't already. One approach is to calculate what the monthly costs of home ownership would be for you and take that difference between that cost and your rent costs and set aside that amount aside as savings. Put this money into a separate savings account for just home ownership. This can help lessen the temptation to use those funds for other purposes. This not only helps you save up money, but it also gets you accustomed to the financial scenario of adjusting to the monthly costs of home ownership.
2) Do your homework - Get familiar with the different types of loans available and start weighing out those options. The type of loan you pursue may determine how much of a downpayment you will need when it is time to buy. Traditionally, home owners planned to save 20% of the home purchase value for a downpayment to avoid PMI. However, there are also other options that may have lower requirements for down payments. You may even be able to have the PMI waived once the equity in your home reaches 20%. Also, keep in mind that PMI is tax deductible. According to the National Association of Realtors, the median U.S. downpayment has declined to 10% in the last four years. Speak to a couple of different lenders to see what programs they offer and which ones you might qualify for.
3) Explore options - Once you have an idea of how much you will need for a down payment and closing costs, start figuring out what actions can you take to secure money. Certainly, you can set a budget that allows you to pull back on certain spending (dining-out, travel, etc). You may also be able to take advantage of gifting from family or borrow against your 401K or IRA. Ensure you are familiar with the guidelines and consequences of these things as part of that exploration. Some borrowers may also qualify for downpayment assistance through federal, state or local programs if they are low to moderate income earners or public servants. Visit http://downpaymentresource.com/.
4) Engage the help of investors - A new approach starting to become more prevalent is to engage investors who are providing downpayment funding in exchange for a percentage of the potential value of the home. Really think through the implications of this option very carefully to ensure you are fully prepared to surrender future equity in your home, as home ownership is often a principal way to fund retirement.
San Francisco-based Unison now has a program available in 12 states and the District of Columbia that offers to match up to half of a 20 percent downpayment on a home. There are several payback scenarios, but essentially the company collects a 35 percent share of the gain, if any, in the sale of the home. Should the home decline in value, the company also shares in the loss, potentially receiving less money back on its original investment. If the homeowner hasn't sold the home after 30 years, a property appraisal is used to determine how much Unison gets paid. The homeowner also has the option to buy out Unison any time after their third year in the home. Unison also doesn't share in the equity that the homebuyer builds as they pay down their mortgage or from investments, like a kitchen remodel.
The key to all of this is thoughtful, proactive planning!