If you’ve been paying attention to mortgage rates in recent months, you might decide that now’s the best time to purchase a home. Lower rates increase purchasing power, and with home prices stabilizing in many regions, you can get more bang for your buck. But even if you have the perfect scenario – sufficient income and an excellent credit score – buying a house isn’t as simple as signing on the dotted line.
Nowadays, you need cash. And without an adequate cash reserve, mortgage lenders will not entertain your application. They’ll not only check your credit history and request tax returns, but also request copies of your bank statements. Why the interest in your bank account? To put it plainly, mortgage lenders have to verify the source of downpayment funds. Getting a mortgage takes more than income and good credit. A downpayment is no longer optional, with conventional mortgage lenders requiring a minimum of 5% down. If you can’t show the money, you can’t buy the house.
Don’t dismiss the idea of buying a house if you presently lack the financial resources. Learn how to save for a downpayment on a house and you can get the keys to your new place sooner rather than later.
1. Setup a separate bank account. Knowing how to save is key to planning your downpayment. Think of the best ways to maximize your savings and grow your money quicker. Maybe you have a savings account with your local bank and plan to keep your downpayment cash in this account. This can work. However, there is a better option.
Consider a high-yield savings account with an online bank, such as American Express, ING or Ally. These banks offer higher rates on savings accounts. The higher your rate, the higher your interest earnings.
2. Decide how much you need. Don’t save aimlessly – have a goal in mind. Roughly, how much do you plan to spend on a house? What’s the average home price in your area? Whatever figure you’re comfortable with, plan to save 5% of this amount.
Next, decide when you would like to purchase your home. With an actual date, you can better prepare your finances and stay on track. If you want to purchase in two years and you need $7,000 for a downpayment, you will need to save at least $291 each month for the next 24 months.
3. Free up cash. There is nothing easy about saving for a downpayment, especially if there’s little cash to go around. Think of ways to reduce your expenses. Simple lifestyle changes can create extra income. Track all your miscellaneous purchases for a few weeks. Do you eat out for lunch? How many hair appointments do you schedule in a month? How much do you pay for cable? How often do you shop? Calculate how much you spend on extras. The money you waste each month can be the factor that stands in your way of buying a house. Learn how to save, and make saving a priority in your life.
4. Liquidate your assets. Then again, maybe you don’t want to wait two years to purchase a home. There is another approach. You can sell stocks, mutual funds and other investments. Do you have a whole life policy? These policies grow in value, thus allowing eligible policyholders to borrow cash against the policy. There is also the option of selling personal belongings, such as a boat, a motorcycle, a car or rental properties. And as a last resort, you can take a loan against your 401(k) or individual retirement account.