How much should be saved for buying home?
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By Scott Sheldon  November 15, 2013 12:00 am

Buying a house is still a pivotal point in life. Your funds play a key role in your ability to get a loan. 

If you’re serious about buying a house or will be, how much of your income should you be saving to realistically get the keys?

Ask yourself if it’s for the shorter or longer term.

SHORT TERM: Lenders look at your pretax income when determining how to qualify you for a mortgage loan. A would-be home buyer plan ought to do the same for determining how much to sock away for the big day. Saving  20 percent of your income could catapult you into purchasing a home in the next 12 to 16 months, depending on your local real estate market. For example, if you’re earning $96,000 per year, that’s $19,200 saved after one year and $25,600 saved after a year and six months, which are plenty of funds to make home-ownership tangible.

LONGER TERM: At least 10% percent of your pretax income is a great place to begin. Using the same example of $96,000 of income, that’s $9,600 per year in savings, which would take an extra year to come up with the same type of cash in the shorter-term approach.

Socking away large sums of cash is no easy task. It requires diligence and attention to detail and the discipline to consistently save despite liabilities. The following accounts can assist in cash accumulation during your home savings process.

Great sources of acceptable funds include:

• 401(k)’s: If your employer matches  a percentage of your monthly contribution, this can aid you in purchasing a home faster as the majority of 401(k)  accounts have the ability to borrow against them for home buying purposes. For example, if  you are receiving a 50 percent match of your monthly contributions to your 401(k),  you can accelerate the time it takes you to save up the cash.

• IRAs: These accounts grow with the market and have the same concept as the 401(k) although without the match. Such an account is a great place to accumulate money in an interest-bearing account that has provisions to purchase a first home.

• CDs and money market accounts: These accounts also grow with the market, but be sure to ask your banker about early cancellation fees.

How much cash for particular house price?

When you buy a home for the first time, there’s the down payment, which is the difference between the purchase price and the loan amount. And then there’s closing costs, equaling “total cash to close.” Closing costs are roughly 2.25 percent of the purchase price. So if you’re looking at a home a $500,000, plan on closing at costs to be around $11,250, for example. 

How much down payment is needed will depend on the mortgage program.

Quick tidbit on loans 

Conventional financing needs a minimum down payment of 5 percent (it varies on maximum loan size in your area).

FHA financing needs a minimum down payment of 3.5 percent. USDA financing and VA financing need no down payment, and Home Path financing needs a 3 percent down payment.

Running the figures…

On a home priced at $500,000, it’s going to take $27,500 to seal the deal with an FHA Mortgage ($500,000 purchase price, $10,000 closing costs and $17,500 for the 3.5% FHA down payment).

Mortgage tip: Remember the lower the down payment, the lower the total cash to close means a higher monthly mortgage payment. 

Conversely, the larger the down payment, the lower the mortgage payment as the percentage of associated mortgage insurance changes with more equity used to purchase the house. 

A 20 percent down payment is what it usually takes to not need monthly PMI.

 

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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