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Preparing for a Down Payment

A down payment on a home is the initial amount of money paid to the seller. The remaining monies due are then calculated into your mortgage loan along with other fees such as taxes, insurance, realtor costs, etc. For example, say you are buying a $100,000 home and place a 3% down payment. You would pay $3,000 initially and remaining $97,000 would be paid via your mortgage loan over time. Most mortgage payments are made monthly with the number of payments determined by your specific repayment terms.

For many prospective homeowners, preparing for a down payment may seem like a challenging and stressful process. Exactly how much should you save? How can you save more money, faster? What are the benefits to putting more money down? To help alleviate that stress, we have put together the following guide to help you prepare for a down payment.

Perks of a bigger down payment

More money down, less money due. While that may sound simple, we understand the challenges of placing a large down payment. However, it’s important to consider the perks of a bigger down payment. In many cases, a larger down payment waives certain fees. For example, placing a down payment of at least 20% of the home’s total price allows you to avoid mortgage insurance costs.

Why is this? A larger down payment requires a smaller loan, which therefore decreases the risk a lender is taking on you as a borrower. Alternatively, a smaller down payment results in a larger loan and higher risk, thus requiring mortgage insurance in the event that you are no longer able to afford your loan and a higher interest rate.

Check in with your spending

We know bigger is better, but how do we get there? For many of us, saving is a challenging habit to create. But like all things, saving takes practice and planning. Start by outlining your budget; including monthly bills, spending on groceries, entertainment, healthcare and more. Look at what you are spending compared to your income.

Is there a shortage or surplus? Identify categories where you could cut back. Are there nonessentials that you can eliminate from your budget, even if it is just for a short amount of time? Some items may seem minimal, but every dollar counts.

Increase your cash flow

Sometimes the biggest deterrent to saving for a down payment is lack of surplus cash flow or income. You may consider looking into a second job that can help increase your cash flow for a short period of time until you make a dent in your savings goals. Another great way to increase cash flow is to sell any unused items, electronics or valuables that can instead be put toward your savings.

Clear your debts

If you have credit card debt, make sure to include in your budget an increase in your monthly payments. This will not only speed up your repayment period, but will positively impact your credit—which will be reviewed when you apply for your mortgage loan.

Set up scheduled investments

Another great tip is to set up an automatic direct deposit from your checking account into your savings. Setting this up on or 2 days after your payday is a great way to ensure all funds are cleared prior to moving money around. Other considerations could be setting up a certificate of deposit or other low risk investment options that can help you save more over time.

Down payment alternatives

Some lenders may accept what is called a “gift fund” to be applied toward a down payment. A gift fund is money from a friend or family member. Most lenders will require proof that the funds are indeed a gift, and that the person gifting the monies has no financial interest in the property.

Connect with a professional

The path to homeownership doesn’t have to be travelled alone. Seek out advice from a local financial advisor or real estate professional that can help craft a personalized plan for you to better prepare for your down payment.

Do you have any questions or tips on how to prepare for a down payment? We’d love to hear them!