How Much House is Enough?
The best first step
Before looking at Real Estate Ads or visiting Open Houses, take the best first step – review your budget carefully. Determine what you can afford as a monthly mortgage payment.
This is your home
Don’t focus on what your friends paid for their home or how large their home is. This is your home. You will be making the mortgage payments not your friends, family members, co-workers, real estate agent or lender. Don’t be pressured to buy a home above your budget.
Consider other home expenses
You will have additional monthly expenses for your home. Real estate taxes, homeowner’s insurance, or HOA (Home Owner’s Association) fees. You also need to plan for maintenance expenses. Things break and wear out over time. Keep a savings account and budget monthly for future home maintenance.
It’s a worthwhile exercise to complete our Budget Worksheet below. Lenders use gross earnings to qualify you for a mortgage loan, but you don’t pay your bills with your gross pay. You pay your monthly bills from your net pay. This is actual income deposited to your checking account. An accurate monthly budget may keep you out of debt.
Don’t be mortgage poor
Leave room in your budget for investments and for your retirement. Remember the saying, "don’t be mortgage poor". It’s also wise to have money for entertainment, travel and recreation. Manage your home expenses or your home expenses may manage your lifestyle.
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Down Payment Resources
How to Gather Cash for a Down Payment
Fear about saving enough money for a home purchase holds back many buyers, but you may need less and have more ways of getting cash than you think. According to the National Association of Realtor’s Housing Opportunities and Market Experience (HOME) survey, more than 80 percent of prospective buyers think a down payment of more than ten percent is required. In reality, mortgage loans are available with down payment requirements as low as 3 to 3.5 percent and in some cases zero percent, such as VA loans.
Still, if you’re purchasing a home for $250,000, even a 3.5 percent down payment comes to $8,750. However, there are numerous ways you can come up with the cash you need. Some suggestions:
- Check out homeownership programs. Down payment assistance is available through state and local government programs to encourage homeownership. While many are limited by your income or capped at a maximum loan amount, you may be surprised to find that the limits can be high, especially in high-cost housing markets. Programs are available for people buying in neighborhoods where the local government wants to increase the number of homeowners and are available for people who work in certain fields such as teachers, health care workers or policemen. Check out www.downpaymentresource.com to find a variety of programs that might help you.
- Start saving. The quickest way to build up savings is to set up an automated savings system that sweeps money from each paycheck into a separate account. Deposit any bonus or commission money, too. You can also sign up for savings programs that round-up your spending – Bank of America’s “Keep the Change” is one – although it can take a long time for significant sums to accumulate that way.
- Consider a second job or overtime. If you have the opportunity to work extra hours, sweep all of that money into your down payment fund. If your job doesn’t allow you to make extra money that way, consider things you can do in your free time to earn money such as walking dogs, babysitting, waitressing a couple of times a week – anything that brings in money that you can dedicate to your housing fund.
- Find a savings match program. BoostUp.com, an online savings platform, not only helps you accumulate your own savings, it also allows other people to match your savings. Friends and family members can contribute to your fund – think about asking for this in lieu of a birthday or holiday gift. In addition, the site has brand partners that contribute to your account. Check out state government savings programs, too. For instance, in Virginia you can save up to $50,000 towards a down payment and closing costs without paying taxes on the interest you earn as long as you declare that the funds are for a home purchase. You also register for cash for a down payment instead of a traditional wedding registry or baby shower registry.
- Ask your parents or grandparents for help. Your relatives can give you up to $14,000 per year without paying a gift tax, but you also need to follow the rules of the mortgage program by getting a letter from them stating that you don’t need to pay the money back. In addition, some programs require you to contribute some of your own money to the down payment. Your lender can help you find a loan program that meets your needs.
- Borrow from yourself. If you have a retirement account, check out the rules for borrowing from it for your down payment. Do be careful to understand the rules so you avoid a tax penalty and make sure you have a repayment plan.
Explore every possible avenue for down payment funds and you may be ready to buy faster than you think.
Michele Lerner is an award-winning freelance journalist and author based in Washington, D.C. who has been writing about real estate and personal finance for more than two decades. She writes for consumers, Realtors and investors. Her work appears regularly in The Washington Post, New Home Source, Bankrate, Fox Business, MSN, Yahoo, The Motley Fool, REIT magazine, Realtor.com, HSH.com and numerous Realtor association publications. She is the author of "New Home 101: Your Guide to Buying and Building a New Home" and "HOMEBUYING: Tough Times, First Time, Any Time."