2 Important Things That Can Help You Save for a Down Payment

Week five of Home Economics is here to help.

2 Important Things That Can Help You Save for a Down Payment  By now, you know your budget inside and out. You've got a good handle on how much you can afford for a mortgage payment, and have money socked away for all those extra fees. But your homeownership puzzle has a missing piece — how the heck you're going to come up with a big ol' down payment. Week five of Home Economics is here to help. THE LESSON Pencils down! Here's what you need to know this week. Down payments are the most common hurdle for first-time buyers, especially for those who have student loans or won't be receiving financial gifts from family members — which, BTW, isn't talked about much and should be. (Here's why.)   Here's some encouraging news, though: Down payment challenges don't need to derail you from your homeownership goals, and you may be surprised by how little you need to put down.   "You absolutely do not need 20 percent for a down payment," says Tony Matheson, a certified financial planner and founder of Matheson Financial Partners. "Lenders have many ways to help first-time buyers get access to a loan."   The minimum down payment for an FHA loan is just 3.5 percent, and some lenders will offer conventional loans (i.e. those backed by private lenders) for as little as 3 percent if your credit score is at least 620, says Matheson.    As you start working with lenders, ask what down payment assistance programs you might qualify for. You can get a head start on this by researching programs and grants on your own. Your state's housing finance agency is a great place to begin. Working in tandem with a financial planner and a housing counselor can help you come with a strategy that will best suit your financial situation.    In addition to researching grants, you'll also want to get familiar with the different types of loan programs to better understand all the mortgage lingo. With a 30-year mortgage, for instance, you pay more interest than you would on a 15-year mortgage, but your monthly payments are lower. Overall, the most common loan is a 30-year fixed-rate mortgage, largely because these types of loans offer stability and predictability (which, after the tumultuous year we've had, may be extra enticing!).   Now, you're probably curious: What exactly is a fixed-rate and how does it differ from the less common adjustable-rate mortgage? With a fixed-rate loan, the interest rate will remain the same for the entire loan term, explains Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth. "A fixed-rate mortgage may be the best option for individuals who value consistency and predictability in their mortgage payments," Cheng says.    Adjustable rate mortgages, on the other hand, typically offer an attractive low rate and then reset at a certain point. For instance, a "5/1 ARM" is a mortgage with a locked rate for five years, and then it's subject to adjusting on a yearly basis. They can make sense for first time homebuyers who expect their income to increase, or expenses like student loans to decrease, allowing them to afford a higher mortgage payment in the future, Cheng says.    Just remember, mortgages aren't a one-size-fits-all kind of thing, so it's worth exploring ones that best sync up with your needs. HOMEWORK Try your best to complete both assignments before next week. To think about: What is stressing you out the most about the homebuying process right now? Is it the down payment? Finding grants? The overwhelming amount of loan products? Pinpoint what you're most uncertain or uneasy about, and make a promise to yourself to spend 15 extra minutes thinking about, talking about, and working on that thing. To do: Get your ducks in a row for loan applications by organizing your paperwork. The exact forms needed vary depending on the loan and the borrower's situation. "Most lenders can get a good understanding of your approval odds for a mortgage by reviewing things like recent pay stubs, bank statements, W-2 forms, and tax returns," says Andy Taylor, general manager of Credit Karma Home. If a family member is giving you money to purchase a home, you'll also need a gift letter that states it's indeed a gift, not a loan. Plus, if you're a renter, it's good to have proof you've been paying you rent on time for the past year, Taylor says. RAISE YOUR HAND We're answering questions from our readers and followers. Is it better to have a big down payment or a small one? —An @ApartmentTherapy Instagram follower   It depends on your financial situation! A larger down payment, like the standard 20 percent, allows a borrower to avoid private mortgage insurance (PMI) and other fees, explains Jim Sills, president and CEO of M&F Bank. Putting down 20 percent will also translate to lower monthly mortgage payments, says Keisha Blair, author of "Holistic Wealth: 32 Life Lessons To Help You Find Purpose, Prosperity and Happiness" and founder of the Institute on Holistic Wealth. But you don't want to stretch your budget too thin, and first-time buyers can often take advantage of programs that allow for lower down payments, she says. By doing so, you'll gain some wiggle room to grow your savings or establish an emergency maintenance or repair fund.   Written by Brittany Anas / Edited by Madeline Bilis Follow Us Unsubscribe or Manage Your Preferences  View this email in your browser    To ensure delivery to your inbox please add newsletters@mail.apartmenttherapy.com to your address book.  Apartment Therapy is full of ideas for creating a warm, beautiful, healthy home. If we've inspired you, we may receive a share of purchases made through this email. Apartment Therapy Media 270 Lafayette Street, Suite 1300 New York, NY 10012 ABOUT | CONTACT US | PRIVACY POLICY | TERMS OF USE