Tips to Save for a Down Payment on a House
Create a home buying plan, which includes saving for a down payment, to reduce the stress of purchasing a home.
When you’re planning to buy a house, saving for a down payment can feel very overwhelming and stressful. However, the thought of coming up with a down payment to purchase a house in North Carolina doesn’t have to elevate your anxiety level and keep you up at night. With a better understanding of down payments and proper planning and by following a few tips to save for a down payment on a house, you will find the home buying process less stressful and more enjoyable.
Mortgage Down Payment Basics
Did you ever wonder why lenders require a down payment? The amount of money a borrower uses as down payment is an incentive for that borrower to make mortgage payments. If mortgage payments are not made, then the borrower loses that money along with the home and any equity in the property.
The amount of money you are required to use as a down payment to purchase a North Carolina home depends on many factors. Some of those factors include your credit score, the type of dwelling, whether or not you are a veteran or active duty service member, if you are a first-time home buyer, or if you qualify for a number of other low down payment loan programs.
Typically, lenders require 20% or higher for a conventional loan down payment. That number, however, is not set in stone. Borrowers may be able to pay a smaller down payment amount on a conventional loan with the additional requirement that they also pay for mortgage insurance to provide protection for the lender in case the homeowner defaults on the loan.
Save for Down Payment – Start with a Target Number
Do not blindly begin to save for a down payment without first determining how much of a monthly mortgage payment you can afford. With all your loan options and the variables that are involved in determining how much you can afford when it comes to purchasing a home, one of the smartest moves you can make is to sit down with a mortgage lender and find out how much of a mortgage (and what type) you can qualify for. After you go through the mortgage pre-qualification process, you will have a target number in mind and can start to save for that down payment.
Determine Your Timeframe and Start Saving
How long do you have until you plan to buy a North Carolina house, condominium, townhome or another dwelling? Once you have a target date in mind, you can use that timeframe to chart a course to save money for your downpayment. Borrowers can also download and use an app to track your progress and keep you moving towards your goal.
Let’s take a look at a few savings hacks to help you reach your goal and buy your home.
- Add Savings to Your Budget – When you create your monthly budget, make saving for a down payment a line item even if it means cutting out a few non-essential items.
- Automatic Savings Transfers – Take the pain out of saving by automatically transferring a set amount out of your paycheck into your savings account.
- Bank Your Bonus and Windfalls – Instead of spending your bonus from work or any other cash windfalls (tax refund, birthday gift, etc.), put that money towards your down payment savings.
- Keep that Old Car – No more car payment? Keep the car that is now paid off and use what would have been a car payment each month towards your mortgage down payment.
- Cash Rewards – Start using cash rewards credit cards for purchases and put the cash rebates you earn in saving.
Other Down Payment Funding Sources
You may have other options available to help and add to the amount you save for a down payment. If you are a first-time home buyer, you can withdraw up to $10,000 ($20,000 if married) from an IRA without penalty to purchase a home. If you have a Roth IRA, then you also will not have to pay income tax on the withdrawal.
Just as there are a variety of mortgage programs that offer low down payment options, there are also state and local programs that provide down payment grants or assistance as well as help with closing costs and tax credits. If you are saving to buy a home in North Carolina, visit the HUD website for more information on home buyer assistance programs.
So, what are you waiting for? Follow the process above and start to save for a down payment on your dream home. Ready to start looking for the perfect North Carolina home for sale? Contact us, and we’ll help you find the perfect home at the perfect price right here in Raleigh, Chapel Hill and Durham, North Carolina.