Saving for a down payment can be easier than you think
According to the National Association of Realtors, the most difficult step in buying a home is saving for a down payment. HouseLogic.com, NAR’s homeowner’s website, recently reported that the 20 percent down payment requirement is “one of the biggest misconceptions about home buying.” Misunderstanding, flattery concept. Saving for a down payment is not that difficult to accomplish.
Let’s start with the 20% misconception. The average down payment for first-time home buyers in 2021 was 12 percent of the purchase price, according to NAR. The average down payment for first-time buyers was 6 percent. Just over a third of all buyers bought with an FHA loan that requires a 3.5 percent down payment. The Veteran’s Administration and USDA both offer zero-down loans, while the New Mexico Mortgage Finance Authority offers programs for low- and middle-income buyers that require a minimum cash investment of just $500.
Freddie Mac and Fannie Mae both offer products that require only 3 percent down. Remember that loans are like shoes and lenders are like shoe stores. Not all shoe stores carry the same shoes, and not all lenders carry the same loans. The key to being a savvy shopper is to remember that even if two “stores” carry the same products, they may not be priced the same.
In addition to saving for the down payment, buyers also need to consider the closing costs associated with the purchase. In our area, where the average selling price for existing homes is only about $260,000, buyers can expect a minimum of about $4,000 to $5,000 for credit and appraisal fees, homeowners insurance, and other associated costs.
Now that we know that homes can be bought for far less than 20% off, the next task is to figure out where the money is to be found.
I jokingly tell people that the New Mexico Lottery could fund their down payment and closing costs and maybe even the entire house, albeit with pretty good odds. A better way would be to raise gift funds from friends, family, or employers. Some nonprofit organizations offer down payment assistance. Borrowing retirement accounts is another alternative, but be sure to research any penalties you may incur associated with the withdrawal. Your income tax refund, if you’re lucky enough to get one, can also suffice.
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You can also consider crowdfunding sites like Kickstarter, GoFundMe, and Indiegogo to start your home search. Lenders will want to know the names of your individual contributors if the money was deposited into your checking or savings account just prior to applying for a loan. Therefore, it is better to complete the financing process and transfer the money at least two months before applying and ready to buy. By the time you are ready to sign on the dotted line, the funds are “seasoned” and no longer subject to verification.
Another method to reduce the upfront payment amount is to require the seller to pay your closing costs, which would reduce or eliminate the cash required to complete the purchase. Keep in mind there is no free lunch. You could have bought the property for a lot less if you hadn’t asked for the concession. Instead, you fund so much more in exchange for a lower cost of ownership.
And finally, you can sell part of your assets. Depending on the number of hobbies you’ve picked up and given up over the years, you could be just a flea market away from living on Easy Street.
See you when it closes.
Gary Sandler is a full-time real estate agent and President of Gary Sandler Inc., Realtors of Las Cruces. He is happy to answer questions and can be reached at 575-642-2292 or [email protected]