September 7th, 2017 8:53 AM by Jackie A. Graves, President
up a down payment to buy your first house can seem a pretty daunting task. If
you've never had more than a few thousand dollars in the bank at any given
time, then setting aside five figures or more may seem impossible.
However, getting a down payment
together is not as difficult as you may think -- if you go about it the right
Figure out how much house you can afford
step in saving up your down payment is to pin down the amount you can
responsibly spend on a house. Lenders will typically limit your mortgage amount
so that your monthly housing payments (including property taxes and insurance)
will not exceed 28% of your pre-tax monthly income.
But if your income is a bit iffy
-- for example, if your pay fluctuates seasonally or you work in an industry
with high turnover -- shoot for a lower percentage, perhaps 20% or so. After
all, home ownership usually comes with additional expenses beyond that monthly
housing payment: repairs, additional utility bills, homeowner's association
fees, and so on.
calculator can help you figure out just how much home you can
afford -- but remember that no calculator can account for every aspect of your
Set a savings plan
Once you know how much you need
to save, the next step is to figure out how much you can set aside each month.
That will also help you determine how long it will be before you'll have the
full down payment and can start house-shopping.
For example, if you plan to save
$45,000 for a down payment, setting a time frame of five years to save $45,000
means you'll need to save about $9,000 per year, or $750 per month, to make it
Squeezing an extra $750 per month
from your monthly budget will likely mean some serious cutting of expenses
and/or finding new sources of income, such as a side hustle.
You can play around with a savings calculator to see how different
time frames will affect your monthly savings requirements.
Speed up the process
One way to make the saving
process go faster is to get better returns on the money you're saving by
investing part of it in stocks. It's a riskier course of action than sticking
the money in a savings account, but if you have several years before you buy a
home, then it could greatly accelerate your savings plan. It would also mean
you don't have to save quite as much to reach your goal, because your money
would be earning more money for you.
Your best bet is likely to choose
a stock index ETF or two, which will instantly diversify your holdings, thereby
reducing your risk of losses. Then hang on to the investment and let it grow
for as long as possible, bearing in mind that you may have to ride out some ups
and downs in the market.
Also, don't put all of your down
payment money into stocks; limit yourself to about 25% of the whole. That way,
if the market heads in the wrong direction just as you're looking to buy a
home, most of your savings will be protected. The rest of the money can go into
a savings account -- but don't limit yourself to your local bank's offerings,
because many internet banks pay much higher interest rates on their money
market accounts than you could get from a standard savings account at your
Borrowing from your 401(k)
If you have a well-funded 401(k)
account, you can borrow up to half the money (to a maximum of $50,000) and use
that money as part or all of your down payment. You will have to pay the money
back within five years, including interest, but at least the interest payments
will go to you and not to some other creditor (the interest is paid into your
However, there are some potential
drawbacks to tapping your retirement accounts for non-retirement purposes. If
you don't get the money paid back, not only will your retirement savings suffer
a crippling hit, but you will have to pay both income taxes and penalties on
the entire amount outstanding.
Plus, if you change jobs during
the repayment period, you'll be required to pay back the remaining balance
within 60 days. Finally, taking money out means there's less money in the
account earning returns for you, which could derail your retirement savings
Bottom line: A 401(k) loan may be
an option for getting your down payment, but it's risky -- and don't even
consider it if there's a chance you may change jobs in the next five years or
if you're within 10 years of retirement.
If 20% down just isn't possible
The traditional 20% down payment
is still the best option. For one thing, it lets you skip private mortgage
insurance, an annoying expense that can put yet more strain on your budget.
But if 20% down is not in the
realm of possibility, there are programs that can get you into a house with a
much smaller sum. For example, FHA programs let you pick up a mortgage with as
little as 3-1/2% down if your credit score is at least 580.
Assuming that you decide to shoot
for a mortgage of $180,000, saving a 20% down payment allows you to set a
maximum affordable home value of $225,000 -- and calls for a down payment of
$45,000. On the other hand, if you decide to save only 3.5%, then the most
house you could afford would be about $190,000 -- that will give you a mortgage
of $183,350 and a down payment requirement of $6,650.
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