Saving for a Down Payment on a Home

Owning a home instead of renting is often a wise financial move. It allows you to reduce your overall monthly costs while you build equity in real property. The biggest financial hurdle you face before you can buy a home is gathering cash for the down payment. Saving for a down payment requires financial discipline and probably quite a bit of time, but it is a necessary step to achieving the dream of owning a home.

How much do you need for a down payment?

At the bare minimum, your down payment must be 3.5% of the purchase price of your home, which is the requirement to obtain a Federal Housing Administration (FHA) loan.

If you are planning to use a traditional lender rather than the government-insured FHA mortgage, it will be wise to shop around and determine loan availability in your area. At the end of 2014, mortgage guarantors Fannie Mae and Freddie Mac started to lower minimum down payments for mortgages they guarantee down to 3% from 5%, which might increase their availability. Individual lenders will set their standards, so you’ll probably find different levels of loan availability between 3% and 20% down payment levels.

If you can manage it, your target down payment should be 20% of the purchase price. That way, you can avoid having to pay mortgage insurance, which will save you thousands of dollars over the course of the next few years. You can also qualify for lower interest rates on your mortgage when you put 20% down. Moreover, the more money you put down, the more equity you will have in your home right away.

What are the available sources of down payment funds?

Obviously, your income and any existing savings you have can make up all or part of your down payment. However, you should also consider other possible sources of money for your down payment:

Grants may be available in your city, state or from your employer. Grants are especially common for first-time homebuyers.
You can borrow or withdraw from your retirement accounts. Many employers allow you to borrow from your 401k at no cost, but you have to pay yourself back with interest. If you have an IRA, you might be able to withdraw money with no early withdrawal penalties if you are using it to purchase your first home. However, remember that you will be reducing your retirement savings if you do this.
Depending on your type of mortgage and financial situation, some or all of your down payment may be able to be a gift from a family member. Talk to your lender about the limitations and whether you need specific documentation for the cash gift.

Down payment savings boost:

One of the most beneficial saving strategies available to you is the Ohio Homebuyer Plus Savings Account (OHB+), a high-yield, tax-advantaged savings account designed exclusively for Ohio residents. OHB+ with First Federal Lakewood gives you a powerful savings advantage, including:

A high-interest savings account, so your savings grow much faster than with a standard savings account.
Tax benefits that may qualify you for Ohio state income tax deductions.
A faster path to your future front door.

Learn more about OHB+ with First Federal Lakewood here or open an account!