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Employee

Question

I have $0 saved for a down payment. I want to buy a home in five years. What should I do? Go:

Forum|Forum|7 years ago
August 3, 2018
36 replies
0 views

Title says it all, but I'm looking for a five year plan. How can I save enough for a down payment? And what other things can I do, over these next five years, to prepare me (credit score improvement, etc.)?

Give it to me straight Team.

(oh, and some related details: credit score sits at 760, I have literally no debt at the moment, I can't imagine buying a $1M home so let's assume the down payment will be south of $100K, I'm 32 years old, and I've got a grad degree)

Show previous replies

JesseMc

Employee

Here are the elements to get you the best interest rate: a) FICO 740 or above, b) Debt to Income (DTI) less than 50%, c) no derogatory items on your credit report, d) being a full-time employee in the same line of work with no gaps for at least 2 years with stable or increasing annual income.

There are loan products that allow as little as 3% down for first time home buyers. As mentioned before, mortgage insurance (MI or PMI) is required (either borrower paid or lender paid) for loan to values (LTV) greater than 80%, typically. If PMI is lender paid, it results in a slightly higher interest rate but you do not see an actually monthly line item for that cost; it also means you pay for it the entire term of the loan rather than being able to cancel PMI once your LTV reaches 78% of the initial purchase price.

Keep in mind that on top of a down payment you will have other closing costs and fees to cover, such as: appraisal, home inspections, title, escrow reserves, pre-pays for home insurance and interest. If the home you are looking at has mandatory HOA dues, those will need to be factored in to your overall monthly payment too.

Don't think you are looking for the home you will retire in as your first home purchase. You are looking for a starter home to stay in less than 10 years, typically. Good luck!

SopranoJessi

Employee

First, look to see if your state has any Programs that help with down payment assistance. There may be First Time Homebuyer's assistance for example. In Nevada, they have several programs where the State pays closing costs, they pay the down payment and it's not limited to first time buyers. The max income to quality for Nevada's program is $95k with a minimum credit score of 640. These prorams may have a higher interest rate but they give you free money to get into a home. Regarding down payments, if you put less than 20% down you will be charged PMI or mortgage insurance. This will be tacked onto your mortgage and will increase your monthly payments.

Next, ask yourself how much you're willing to pay in mortgage payments every month. Not only that, but factor in utilities and possibly HOA fees. Water, Energy, Gas, Trash/Recycling, Internet should all be factored into your monthly payments. Keep in mind that depending where you live, your Energy bill mY have huge spikes from heavy use of AC or Heating. Also, once you buy there is a daunting realization that you have to be able to make this mortgage payment FOREVER (or unless you sell the property). So you have to be comfortable with the monthly mortgage payment.

Next, Loan Type. Buyers accept offers in the following order: Cash, Conventional, FHA, VA . I recommend you go with a Conventional Loan. But definitely ask your lender about the differences.
Also factor in how much remodeling you need to do. That will cost you!

Oh also, you need to SEASON your money. That means, your money needs to sit in your accounts UNTOUCHED for several months while you look for a property. The lender will ask you for bank statements to see where your money is coming from and where it goes, while they determine if you are able to maintain a mortgage. That means no opening of any new credit accounts and no big purchases.

CLOSING COSTS. This one surprised me. I was so focused on the down payment, I didn't realize you needed just as much in closing costs! Ok, you don't need a 20% payment in closing costs, but this is the point where everyone gets paid. So be prepared to set aside a couple THOUSAND dollars for closing costs. You can negotiate who covers these costs (seller, buyer) or you can split the costs. This is also used in the negotiating to buy, because sellers are prone to accept offers where Buyers pay closing costs.

Well you're debt free so that is fantastic!!! The important thing to know is that you may be offered a big loan, but you must think of a monthly payment you are comfortable paying Evey month, even if. You lose your job.

Since you are debt free, you should have no problem Saving for a 20% downpayment. You could probably get into a home sooner than 5yrs.

SopranoJessi

Employee

Once you get into your home, if you don't have enough cash or you don't want to use all your cash up for any remodeling, Home Depot's credit card allows interest free financing for up to 24 months (depending on how much you spend) or even 12 months. You can pay that off before the promotion expired and keep your cash but get your flooring done or buy appliances. Just a thought!

_D42_2

Employee

Buy through upromise and save even more on your update.

CJATLRealtor

Employee

You're not alone and you shouldn't wait 5 years! Focus on saving for a rainy day and buying a home before prices and rates increase anymore. There are several down payment assistant programs and $0 down mortgage options available now. As a Realtor, I encourage all of my clients to TALK to (not fill out online applications) a few mortgage lenders to learn about the best financial fit for their situation.

CLASSMaster

Employee

I live in Massachusetts, where property cost is really high (a shoebox house in the worst part of town is at least $250,000). No bank expects 20% down, let alone 15%. If you can do that, awesome. Banks around here like at least 5% down. I would put 20% of your check into savings each pay period, and after two years I would get a 3 year CD with a high interest rate. Your credit score is fine and as long as you keep doing what you're doing with bill payments. Keep your debt to income ratio low and you will be good. 5 years for a person of your age with a graduate degree sounds like a long time to save for a down payment, but I don't know your circumstances.

NG2019

Employee

You can buy a home with little down payment, it just means your monthly mortgage payments will be a little higher. Your credit score is within the highest range and will get you a lower rate, but just barely. I got a 4% interest rate on my house and my score was a couple points below 800, in the 790s at the time. Now it's 800 even.
You could get another card and make on time payments on it for the next few years. The number of cards you have doesn't matter, it's the total amount available to you that you are using. The less you are using of it, the better.
Good luck and talk to a good lender. They answer a lot of questions. I'm also 32 and I bought my home at the very end of 2017.

_D42_2

Employee

I linked my savings goal (b-day celeb) to my savings on food. Made a budget on Mint and opened an interest bearing checking account that pays me to SAVE 💰🧚🏻‍♀️

30ecb

Employee

Does any of this advice work in California?

zyxelenator

Employee

Love how people optimistic about the paying off all those cars/ student loans in just 5 years. Like everything will be perfect, you will never get any medical bill in that time, car will require 0$ maintenance? Emergency fund is a must. It has always been for me lately, as soon as I start trimming down that debt and save some money- some **bleep** hits a fan...

Mammadaisy

Employee

I hear you. I feel the same way.

Cereon12

Employee

Since your credit score is so high if you live in a area that’s in a USDA District then you wouldn’t have a down payment to put down cause it’s 100% financing... Any score from 640+ and up can get a USDA Loan with no down payment.

_D42_2

Employee

Is this related to the USDA up to 80 acre giveaway if you are going to grow?

Galexg

Employee

All the advices I read below are bad. You want to buy that soon and not wait 5-10 years like all these nutheads are suggesting. Get a second job or create a second job. Start a landscaping company, painting houses on the weekends, uber... whatever gets you busy. The busier you are the less money you spend, the less you have to go into dumpsters eating out of trash cans the more money you make for that 20% down payment. If the mortgage is slightly above the price you were looking for.... buy it and rent some rooms out.

Chanaysk16

Employee

I know a down payment for a house in Colorado is $10k and you can save up $10k for 2.5 years fast .. If you set aside $300/500 a week or a month.. For a condo its $5k .. You have to cut down like Comcast, ..etc to make improvements to saving.