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Saving for a Down Payment
by Michael Licamele
Saving for a down payment on a home can be one of the most challenging tasks a young family faces in the quest for home ownership. Creating a down payment savings plan and sticking to it will help potential buyers reach their goal of home ownership faster.
The purchase of a home entails saving for three up-front costs. The down payment is the largest part and is a percentage of the total purchase price of the house. As the economy has improved and home prices have stabilized in recent years, down payment requirements in New England have dropped considerably. Today, first time home buyers can purchase a home with a down payment ranging from three to five percent of the purchase price.
In addition to a down payment, funds are needed to cover closing costs. Closing costs include all fees required to execute the sales transaction, such as attorney fees, title insurance, appraisals, points and tax escrows. While these charges vary considerably, most home buyers will need at least $3,000 to $5,000 for closing costs.
Finally, home buyers need to show that after paying the down payment and closing costs they will still have some reserve funds to protect against short-term cash flow problems. Ideally, a home buyer will have at least three months' worth of housing payments available after closing. These funds do not need to be paid out; they simply remain in the home buyer's savings.
As an example of total cash required, a home buyer purchasing a $200,000 home with a $1,750 monthly housing payment would need to have approximately $20,000 available. This includes $10,000 for a five percent down payment, approximately $5,000 for closing costs and about $5,000 in payment reserves. After closing, the home buyer would have $5,000 left over.
For many first time home buyer programs, 2% of the down payment can be financed along with a portion of the closing costs, and reserve payment requirements can be reduced. These programs can decrease cash requirements from over $20,000 down to less than $12,000 in the same example.
Based on the requirements outlined above, future home buyers can develop a savings plan that will help them achieve their goal of home ownership in the near future. Since the down payment required depends on the purchase price, a home buyer should meet with a mortgage lending professional to determine how large a mortgage can be obtained. The maximum loan amount will determine the approximate price range in which a home buyer should be looking.
For example, a home buyer whose income will support a mortgage of $190,000 can look for homes with a price of about $200,000 and plan to save a down payment of about $10,000.
Article continued at http://www.mortgagealmanac.com/articles/96-savingfordownpayment.html
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