Saving for a down payment
Let’s imagine for a moment that you don’t have a rich uncle who recently left you a large inheritance. Imagine that you’re not a titan of tech and cannot count on stock options to help you purchase your first home. Imagine that it’s all up to you. The decisions you make on a daily basis will determine your ability to come up with the down payment needed to break into the housing market.
Before proceeding any further into this scenario, the ever-honest Jason Wheeler, a mortgage broker with Bay Area Mortgage and Real Estate in Pleasant Hill, recommends that you ask yourself if homeownership is really the best thing for you. Do you plan on planting roots in the area long enough to build equity? Will a house payment and consequent upkeep make you house poor? Are there other ways you would rather spend your money? Can you financially withstand a correction in the red hot market. “All it takes is one unexpected, significant world event to change the market,” Wheeler said.
If you are still full steam ahead and really want to get into a home you can call your own, it is possible. “There’s no way to sugar coat it, it’s very difficult here,” Wheeler said. “Saving is a marathon. It’s takes time and diligence.”
The first notion to get out of the way is that you must have at least 20 percent down in order to buy a home. According to the National Association of Realtors (NAR), approximately 60 percent of home buyers finance their homes using 6 percent — or less — down payment.
Glenna Nickerson, on the board of directors for the Contra Costa Association of Realtors and a senior loan officer at SAFE Credit Union, agrees that saving can be difficult, particularly for those living paycheck to paycheck. She reminds potential home buyers that there are low down payment ways to get into a house. In addition to 0 percent down VA loans for veterans, an FHA loan requires only 3.5 percent down payment, and many lending institutions — including her own — offer very low down payment programs. There are also grants for teachers and a number of special plans geared toward first-time buyers. Nickerson says that a first-time buyer is classified as anyone who has not owned a home in the past three years.
The longtime mortgage veteran recently worked with a couple who went the extra mile to buy a home. As a teacher and school counselor, they were certainly not competing with high income earners in the area, but they were determined to have a house of their own. Toward that end, Nickerson said that the newlywed couple made lifestyle changes, including spending a few months living with a family friend (to whom they paid minimal rent), holding on to money they received as wedding gifts, and rarely going out to eat. Finally, at Nickerson’s suggestion, they applied for and received a first-time buyer’s grant from Wells Fargo Bank.
Even if you’re just beginning to save for a down payment, Nickerson says it is a good idea to call mortgage lenders in order to find out about the kinds of grants they may have available. If getting a down payment together is going to be a challenge, she says you might also want to begin to consider looking eastward toward less expensive counties and towns.
According to Jason Wheeler, the idea is to be consistent. Come up with a savings plan and stick with it. The first thing he suggests is to work on paying off existing debt. As one debt is paid off, apply that monthly payment to the next debt until they are all gone. The process is referred to as “snowballing.” He agrees with Nickerson’s suggestion to get in contact with a good mortgage professional who can take a look at what you are working with. Once they understand your income, debt, and any other issues that will impact your ability to buy a home, they can offer advice to help you create a game plan that works for your particular situation.
Although the saving process may seem daunting, it can be done. Here are some ideas that may inspire you:
• Cut the cord. The average cable bill costs $100 per month. Cutting that luxury will help you save $1,200 per year.
• Take in a roommate. Even if you are a family with children, determine if there is a way to free up one of the bedrooms in order to rent it to a young professional or college student. At $800 per month, it would net you $9,600 in one year.
• Make coffee at home.
The average cost of a latte at a coffee shop is around $4. Even accounting for the cost of supplies to make your own, you could save $1,100 each year.
• Stop eating out. According to the NAR, the average American spends $232 per month eating out. Cutting the habit until you have a down payment in place can save a single person $2,784 per year.
• Brown bag it. The average American worker eats lunch out twice a week, spending an average of $11 for each meal. Eating something you’ve brought from home can save you more than $1,100 each year.
• Use public transportation. Again, according to NAR, the average American spends $713 per month on their car, including payments and upkeep. Getting rid of the car will allow you to save more than $8,500 in one year.
It is fair to say that making sacrifices to save money takes determination and few people would consider it fun. Still, knowing that at the end of the struggle is a Bay Area home you can call your own must take some of the sting out of the process.