Future Planning

5 Variables to Consider When Saving a Home Down Payment

BY Richard Montgomery TIMEFebruary 8, 2022 PRINT

Dear Monty: Our New Year’s resolution for 2022 is to save up a down payment to buy a home. We are not clear how much money we need for a down payment. We both have suitable stable employment and have rented since we married over four years ago. Now we want to start a family. How much money do we have to save to buy a home?

Monty’s Answer: There are some variables built into your question. Here is a list of variables to consider in establishing a saving goal dedicated to your down payment.

No. 1: Where You Live, or Where You Want to Live

According to World Population Review, Hawaii’s typical home cost is the most expensive at $1,158,492. The lowest-cost state for housing is Mississippi, with a usual sale price of $114,500. The other 48 states are somewhere between these states. The difference in down payment requirements and monthly payments on a mortgage is substantial.

No. 2: Your Income and Your Credit History

Mortgage lenders have borrowing guidelines on the percentage spent of the family income on a mortgage payment. Homes are the most expensive product most people buy. Typically, they look at between 28 to 35 percent of take-home pay for homeowners to spend on a mortgage payment. Some lenders may allow even more if you have no debt, higher income, and one of the most stable professions.

No. 3: Your Strategy to Gain Homeownership

Some consumers want to and can save to buy their dream home as their first home, or they will rent and save for many years for it. Others will buy a home they can afford without all the amenities or the neighborhood they eventually seek as soon as they have the minimum down payment for a starter home. Others will start with an income-producing property to help pay the mortgage and keep it as an investment when they can upgrade.

No. 4: Your Desired Lifestyle

Your lifestyle can make a big difference in the home you buy. Suppose you like to travel extensively, eat out often and at high-end restaurants, or enjoy expensive hobbies. In that case, it may mean a smaller home than you could afford otherwise. Some consumers see a home today differently than their parents did—as a place to stop and change clothes. Conservative lifestyles may include your home as the central feature for your family. Selective entertainment, home cooking, and at-home hobbies, such as gardening and reading, allow for a more comfortable home.

No. 5: The Types of Mortgage Loans Available

There are mortgages and even grants to help gain homeownership. The grants vary state by state or even by city. The national mortgage programs have different down payments and other requirements, like mortgage insurance to minimize your out-of-pocket downstroke.

The primary mortgage loan program down payment requirements are:

VA: Zero down payment.

USDA: Zero down payment on rural low-income loans.

FHA: 3.5 percent down with good credit.

Freddie Mac Home Possible: 3 percent down with good credit.

Fannie Mae HomeReady: 3 percent down with good credit.

Conventional loans: require a down payment and sometimes mortgage insurance.

Richard Montgomery is the author of “House Money: An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty or at DearMonty.com. Email him at monty@dearmonty.com.
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