How to Save for a Down Payment on Your Dream Home
Buying a home is an exciting milestone that not only represents success and achievement but is also a setting where many memories will be made with family and friends. As you move forward toward an actual purchase, however, coming up with a down payment may feel daunting, if not impossible. For many homes, the average expected down payment can be 20% of the home price. For instance, 20% would translate to plunking down $100,000 cash for a $500,000 home. Plus, closing costs can add up to another $20,000 or more; interest rates are high; and inflation isn’t exactly low either.
Given the financial commitment that buying a home requires, you will want to have a plan in place as you balance other priorities like saving for your kids’ education. Fortunately, help is out there. Below, we’ve compiled a list of tips with some invaluable resources for planning and saving for a down payment—including a useful solution in the Wells Fargo Mobile® app that can help you start saving now for your future dream home to help you act fast when you find one that you love.
1. Prioritize Access and Growth for Down Payment Savings
Often, vessels with higher-growth potential (i.e., stock mutual funds, stock portfolios) require some lead time before you liquidate, or cash out. Conversely, accounts where your cash is easily accessible, like standard savings accounts, often don’t offer the highest of returns. So, you may want to save aggressively for the long term a few years or more before beginning your home search. Then, withdraw the funds you’ve earmarked for a down payment into a more liquid account when you officially kick off your search. You don’t want to lose out on a house in an ideal neighborhood because your funds aren’t easily accessible.
LifeSync® in the Wells Fargo Mobile® app can help you keep track as you work towards your personal financial goals, like buying a home, through content personalized for you. It helps you create a specific goal amount and track progress toward that goal, and it offers market commentary, timely insights, and contextual information.
2. Talk to Mortgage Brokers
Mortgage brokers are well-versed in interest rates, bank mortgage products, and the economic factors at play. They may be aware of programs that help first-time homebuyers through tax credits, reduced interest rates, and programs specifically tailored to students, former members of the military, senior citizens, and others. They also can help you figure out the down payment/mortgage loan ratios that may work best for you. An extra $50,000 down at a 7% interest rate equates to about $416/month. When you engage with a broker, they will want to do a credit check, but you can come prepared with other data about your personal finances through LifeSync® in the Wells Fargo Mobile® app.
3. Research Government Programs and Partnerships
Through your local or state government, you may have access to down payment assistance programs in which nonprofit organizations or the city itself partner with banks who see the borrowers—especially first-time homebuyers—as possible new clients.
Often, state and local governments have their own programs. Vermont, for example, offers a Down Payment Assistance (DPA) program in which the state provides assistance through a non-amortizing, 0% second mortgage (for which the borrower does not have to pay the principal owed until the loan is due). New York City offers the HomeFirst Down Payment Assistance Program, which offers qualifying homebuyers up to $100,000 toward the down payment or closing costs. Begin researching programs like these through your city or town’s local lenders and your state housing commission.
4. Look Into Your Employer Benefits
Often employers, including hospitals and universities, offer financial assistance that may be forgiven over a number of years or offered as a gift outright. According to Fannie Mae, these can come in the form of a grant; a direct, fully repayable second mortgage or unsecured loan; a forgivable second mortgage or unsecured loan; or a deferred-payment second mortgage or unsecured loan (“deferred-payment” meaning you do have to pay it back, but you can do so at a specified later time). Funds generally must come directly from the employer.
It’s worth checking to see if your employer offers Fannie Mae’s Employer Assisted Housing (EAH) down payment assistance program, as the loan is forgiven 20% per year for five years, with no principal or interest payments required from the employee as long as you remain with the company. This means you effectively pay off the loan just by staying at your current company.
5. Understand Affordability and Budgeting
Regardless of these affordability programs, keep in mind what is affordable for you. Experts estimate that your monthly house payment (including principal, interest, taxes, and home insurance) should not exceed 28% of your gross monthly income. So, look at what you make per month before taxes, multiply it by 0.28, and that’s the maximum you should look to spend on this important investment.
Buying a home is a significant financial commitment that requires careful planning and saving. By prioritizing your savings strategy, exploring mortgage options, researching government and employer programs, and understanding your budget, you can make the dream of homeownership a reality. Utilize tools like the Wells Fargo Mobile® app to stay on track with your financial goals and make informed decisions along the way.
