Tips To Help You Save For A Down Payment

One of the biggest concerns of buying a home is making the down payment.  A down payment of 5% on a conventional loan is really just the beginning.  There are also closing costs that can easily total 2% of the purchase price, as well as making sure you have adequate cash reserves to help make a couple of payments in case there are interruptions in your cash flow.

If you are hoping to buy a $150,000 home, you will need $7,500 for a down payment, another $3,000 or so for closing costs and another $2,000 or so in cash reserves or a total of about $12,500.

The following are some tips to help you save for a down payment or reduce the requirements.

1) FHA Loans: FHA Loans require only a 3.5% down payment.  FHA Loans are insured by the Federal Housing Authority.  In some cases, interest rates may be higher.  Not all lenders offer FHA loans.  If you are struggling with the down payment, be sure to work with a lender that can offer an FHA loan.

2) Seller Pays Closing Costs: Your real estate agent can negotiate to have the seller help pay your closing costs - even if you have to add them to the purchase price, especially in a "seller's market."  In a "buyer's market", you could probably offer less than asking price and still get the seller to cover all or some of the closings costs.

3) Sell Your Car: If you have two cars and can get by with one, sell the other one.  If you can get some cash for the down payment and pay off the car loan at the same time, that can help maximize your ability to qualify for the mortgage.

4) Open A Dedicated Savings Account:  No matter how much you have already saved for your down payment, create a new savings account to put the money in. When the money is in your personal account it is so much more tempting to spend it on everyday expenses. Also, a savings account will give you a better rate of interest so that you can help your money grow.

5) Pay Off Your Credit Cards: If you have credit card debt, you will be paying interest charges to the credit card company every month. These charges can really add up, especially if you are only paying the minimum on your loans. If you can pay down this debt you will have extra money every month to put into your savings instead.

6) Use Your IRA or 401K: It is rarely a good idea to take money out of retirement funds because of the negative effect on your retirement plans. You also will owe early withdrawal penalty fees and taxes. However, first-time homebuyers are allowed to withdraw up to $10,000 from individual retirement accounts (IRA) without penalty. If you have a 401(k) account, you can borrow up to half of your vested account balance, but no more than $50,000. Some 401(k) plans allow hardship distributions. To access funds this way, you must prove that your 401(k) funds are the only way you will be able to put a down payment on a home. When you borrow from a 401(k), you must repay the funds, with interest, within five years.

7) Stretch your budget. Review your budget every month to see where you can trim and save. Cut back on nonessential expenses like dining out, concerts and vacations. Try to negotiate lower rates on things like car insurance and your smartphone plan. Consider moving into a smaller apartment that charges less rent. Take a look at your debt load. You can consolidate and transfer credit card debt to a card that charges lower interest.

By combining all of these strategies, the challenge of saving for a down payment may seem less difficult.  Just remember to be strong and not lose focus and you will have your dream home in no time!