One of the biggest challenges faced by first-time homebuyers is saving the money required for a down payment. According to CNN, it can take some people as long as 10 years to save enough funds. Read on to determine how much money you’ll actually need, and tips to reach your goal faster.
Consider Closing Costs
When you begin calculating the exact amount of money that you will need to save, remember to account for more than just the down payment. You also need to take closing costs into consideration. These costs are typically 2.5% of the full price of the home. Not accounting for this can set homebuyers up for disappointment. If you are buying in a hot housing market like Seattle, you may need to account for even higher expenses, such as offering extra money on top of the listing price to make sure your offer stands out.
Borrow From Retirement
Coming up with the money for a down payment can seem daunting if you are starting out with little or no savings. One way to access the large sum of money needed to buy a home is to borrow from your own retirement account. Depending on the kind of account you have, you may be able to borrow as much as 20% of the home’s value for a down payment without having to worry about extra taxes or penalties. There are rules associated with each retirement plan, so check with your accountant and financial advisor to make sure you get the most value from this method. You’ll also want to carefully consider the pros and cons associated with this type of borrowing.
Down Payment Assistance Programs
Down payment assistance programs geared toward first-time homebuyers can help you fill in the gap between your savings and the money needed to buy a home. Look for local grants and loans specific to your area, as well as federal programs like FHA. Many cities have programs that cover significant portions of the down payment, as well.
Long-Term Savings Accounts
Let’s face it: saving money the old-fashioned way can take a long time. It also requires discipline, because you will be tempted to tap into that money when other needs arise. A long-term savings account is a good way to maximize the interest earned on your money, and many online savings accounts offer much higher interest rates than major banks. Separating your home savings from other accounts is also an effective psychological tool to keep you from spending.
Gifts from friends, parents, and relatives can also be used by first-time homebuyers to finance their down payment. One thing to remember is that all gifts must be documented. You’ll need to work with a qualified lender to properly document the transaction as a gift that does not need to be repaid.
Saving for a down payment can be one of the biggest hurdles to purchasing your first home. After you determine how much money you will need, the tips above will help you figure out a plan to reach your goal. If you have questions about down payments or if you are ready to purchase your first home, contact us. Our professionals will provide you with expert advice and service.