00:49 Quick Recap on all the Things
01:30 How Much Down Payment You Need
02:57 A Note on PMI
03:16 Saving = Budgeting
04:28 Separate Your Income from Expenses
05:02 Find What Works for You and Additional Income
In my last video, as well as a couple series’ I’ve done with some of the lenders that I work with, I talked about all the steps you need to take to get a loan for a purchase, so right now, we need to go over how it is that a person can and should go about saving up for a down payment. Because let’s face it, this can be the hardest part. Quick disclaimers – I’m not a lender, I’m a REALTOR – and also this is an update to a video I did back in 2020. So, you might go check that out as well after this one if you fell it’s not covering all the bases… But, this is a more “up to date” version based on the current state of affairs…
If you haven’t been to the channel before, my name is Joshua Smith, I do videos like this often so if this is the type of content that can help you, be sure to like and subscribe so you are notified when I do more videos like this. Let’s dive in.
Quick recap on what you need to get a loan; good credit – anything above 720 to 740 will usually get the best rates, 2 years worth of tax returns (and you better be doing the same thing consistently over the course of those two years), 2-6 months worth of bank statements in some instances (this will show what you’re spending and saving), and then cash reserves – especially if you’re buying income property because they want to see you can afford your life plus this new payment for 3 to 6 months into the future. However on that last one, cash reserves, we’re not talking about under a bed cushion, it needs to be in a bank somewhere, so there’s an explanation and legal trace for where this came from.
Now you need a down payment. How much really depends your end goal for the real estate purchase. If this will be a new primary residence for you, banks may require as little 3-5% – my primary lenders are asking for 3.5% minimum right now – I think these requirements change sometimes. If you’re looking for an income property, the standard is a 20% down payment, but I know investors that can do interest only loans for 10-15% down in healthy markets. There are 0% down payment loans, like VA loans and then in TN and in AL we actually have HUD programs that will give you money for a downpayment – but these options will limit your purchase amount and options because it’s going to raise your monthly payment with the additional loaned money.
I’m just going to call out the elephant in the room you may already be noticing… The problem with a percentage is that doesn’t actually tell you what you need to save because you may not know the average home price for the are you’re looking in, or you may not know how much you need to spend to get the home you’re looking for. The best suggestion I can make for this, is as soon as this video ends, shoot me an email for wherever you’re looking – in Tennessee or Alabama where I work, or anywhere in the US, and I can get you some listing alerts for your area. You have to watch the market to know this info.
Now back to down payments – if you put down less than 20%, you’ll end up paying what’s called PMI – private mortgage insurance. This is an added payment that goes toward insuring the note the bank is giving you. Again, this will add to your monthly payments so it’ll be up to you and your needs to decide how much to save up.
Finally – how do you save for this ever growing down payment? I’ve got to use the B word here, some people might not like me for it, “budget”. If the goal is to buy a house, like that’s priority number one for future plans, then it’s worth cutting back on other areas of your spending to achieve this. Now, if you’re not a spreadsheet person, and I see you – I used to avoid them like the plague – then there are great apps that help out. Mint – I think you can still just go to mint.com for that – it’s an intuit product, the same people that have QuickBooks. This is a quick setup budgeting tool that will help in day to day planning and watching your account balances. I actually use WaveApps.com for this – they don’t have an app but it is a small business tool that I can use for my business accounting as well as my personal budgeting. And then to take that a step further, personalcapital.com will help you plan for any investment goals you drum up, not just the home purchase, but your retirement plans and all the things. You need something like this to know exactly how much you’re spending and how much you’re earning so you can plan and save effectively.
A strategy that works for my business, and may also help you, is to buffer your income. As in, have your income deposit to one bank, and then transfer out only what you need for bills and expenses. Ally bank is a great bank for saving because they have built in tools that will help track your money saving goals.
When you set all this up, look for all the things you can cut back on, save money on or even complete cut out so you can set the money aside you need to save for this down payment. Shop at Aldi instead of Wholefoods. I switched from Cable to streaming apps only a few years ago and it has saved us 100s a month. But for some, this just isn’t going to be enough. The reality is that if you’re not making enough now to set aside any money, you need to look for additional income options. If you want it bad enough, you’ll find a way.
Now one last thing is this – your money can make you more money. So when setting up a separate account to put all this extra cash in, try to utilize a high interest savings account. In the short term, this may be the best way to make additional money, because you don’t want to put it at unreasonable risk. Have patience, practice some discipline, you’ll get there.
If you have questions about any of this, reach out anytime. I’ll see you in the next one.