Set the real target
The down payment is only part of the cash you need. Closing costs add two to five percent of the price, lenders like to see a couple of months of payments left in reserve, and moving in costs more than planned. On a $300,000 home with five percent down, that is $15,000 for the down payment and perhaps another $9,000 to $12,000 around it. The minimums depend on the loan. Conventional loans start at three percent down for qualified first-time buyers, FHA loans at 3.5 percent with a credit score of 580 or higher, and VA and USDA loans require nothing down for those who are eligible.
Work backward to a monthly figure
Divide the target by the months you have. Reaching $27,000 in three years takes $750 a month, and in five years takes $450. Automate the transfer for payday, and add bonuses and tax refunds in full. Housing is the most powerful lever, and a roommate or a cheaper apartment for two years can do more than every other cut combined.
Where the money should sit
Money you will spend within five years does not belong in the stock market, where a bad year could erase a fifth of it just as you find the right house. Use an insured savings account. If your purchase date is firm, certificates of deposit or Treasury bills timed to mature beforehand may pay slightly more.
Help you may qualify for
- State and local housing finance agencies run down payment assistance programs for first-time buyers, as grants or low-interest second loans, generally with income and price limits.
- A gift from family is allowed on most loans, but the lender will require a signed letter stating that the money is not a loan.
- An IRA permits up to $10,000 to be withdrawn without the early withdrawal penalty for a first home, though tax may still apply and the retirement cost is real.
What the lender will look at
Underwriters examine about two months of statements for every account. Any large deposit that is not payroll must be explained and documented, so move gift money into the account well before you apply, and do not deposit cash you cannot trace. In the months before you apply, avoid opening new credit or financing a car, either of which can shrink the loan you are approved for.
Tip For six months before you buy, save the difference between your rent and the projected full housing payment. It tests the payment and builds the fund at the same time.
