If you’ve been paying attention to the mortgage rates in recent months, you might decide that now’s the best time to buy a home. Lower rates increase purchasing power, and with home prices stabilizing in many parts of the country, you can get more for your money. But even if you have the perfect scenario – an excellent credit score and a sufficient income – purchasing a home isn’t as simple as signing on the dotted line.
These days, you need cash. And without an adequate cash reserve, mortgage lenders will most likely not entertain your application. In addition, they’ll not only request tax returns and check your credit history but will also request copies of your bank statements. Why are they interested in your bank account? To put it simply, mortgage lenders have to verify the source of your downpayment. Getting a mortgage loan takes more than good credit and income. A downpayment is no longer optional, with conventional mortgage lenders requiring a minimum of 5 percent down. If you can’t show the money, you can’t purchase the home.
However, don’t dismiss the idea of buying a home if you currently lack the funds. Learn how to save for a downpayment on a home, and you can get the keys to your new place sooner rather than later. Here are some terrific tips to help you:
1. Setup a separate bank account. Knowing how to save is an integral part in planning for a downpayment. Think of the most effective ways to maximize your savings and grow your money more quickly. Perhaps you have a savings account with your local bank and you’re planning on keeping your downpayment cash in this account. This can work. However, there is a better option.
Consider a high-yield savings account with an online bank, such as ING, American Express, or Ally. These kinds of banks offer higher rates on savings accounts, and the higher your rate, the higher your interest earnings.
2. Decide how much you need. Don’t save without a price – have a goal in mind. How much do you plan to spend on a home? What’s the average home price where you live? Whatever figure you’re comfortable with, plan to save about 5 percent of this amount.
Next, decide when you would like to buy your home. With an actual date in mind, you can stay on track and better prepare your finances. If you want to buy in two years and you need $7,000 for a downpayment, you will need to save a minimum of $291 each month for the next 24 months.
3. Free up cash. It’s not easy to save for a downpayment, especially if there’s not much cash to go around. Think of ways to lower your expenses then. Simple lifestyle changes can generate more income. Track all of your miscellaneous purchases for a couple of weeks. Do you eat out every day? How often do you shop? Calculate how much you’re spending on these extras. The money you waste each month can be the determining factor that stands in your way of buying a home. Learn how to save, and make it a priority in your life.
4. Liquidate your assets. Then again, maybe you don’t want to wait two years to buy a home. There is another way. You can sell mutual funds, stocks, and other investments. Do you have a whole life policy? These policies grow in value, allowing eligible policyholders to borrow cash against the policy. There is also the option of selling your personal belongings, such as a motorcycle, boat, a car or rental properties. And as a last resort, you can take a loan against your individual retirement account or 401(k).