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Saving For a Home Loan Down Payment

Jun 2, 2008
With the current credit crunch intensifying the days of no down payment home financing are over. If you want to purchase a home now chances are that in order to qualify for a home loan mortgage you will need a sizable down payment.

Before even looking at homes you should address the matter of a down payment. Or more specifically, the issue of where to get your down payment. You really want to be able to purchase your house fairly soon while good deals are abundant. The question is, how are you going to do it?

Ideally, you should be able to pay 20% of the total price of the house as a down payment. This is an ideal rate for both the buyer and the lender. At 20% a buyer will be less likely to give up on the loan if later he/she become financially stressed than at 10%, ensuring both the lender and the buyer that they have entered into a sound transaction.

So how do you get that all important 20%? Some people think there is only one way to save for that down payment, and that includes saving a certain amount of money every day, every week, or every month, until your savings amount to the down payment you need. And for many potential home owners that is the best way even if it takes some time.

While the above method is a sound way of saving, you should not be limited to it. There are a number of ways that can be effective in helping you overcome that home purchase down payment hurdle.

Read on to get some useful tips on how you can come up with a sizeable down payment.

Tap Into Your 401(k)

To get that down payment, you can tap into your 401(k), which you will have to repay over a period of five years or more, with interest. This method has both advantages and disadvantages.

One of the advantages of getting a loan from your 401(k) is that it is not considered a debt by lenders when they assess your debt qualifications. Therefore borrowing funds from your 401 (k) will not put your loan application in jeopardy.

A major disadvantage of borrowing from your 401(k), however, is that should you have to or decide to leave your current job, you will have to pay the loan in full 90 days before you quit or you are officially terminated from your job. If not observed this could trigger a future tax problem for you. It would be a good idea to check with your CPA on this issue before borrowing from your 401 (k).

Placing Savings into Investments:

If you are willing to wait a few more years and save you can consider speeding up the process a little bit by investing your money in time deposits. Ask the help of a financial adviser to help you decide where your money will get the best returns. Just be aware that some financial advisers may try to steer you to investments where they earn higher commissions rather that to investment plans that are the best for you. Do not blindly follow the advice of a financial adviser.

Placing money into the stock market or a mutual fund is risky, especially just now. Your chances of getting that dream home may go down the tubes should there be a serious stock market decline.

Control Your Budget:

If you plan to take the save until I have enough route, then here is a very helpful tip on how you can save more effectively for that down payment.

Write down everything you purchase. Do not leave anything out. Even if it is a small candy bar that cost you a dollar. Do this for a month, and afterwards assess your spending habits. See what you can improve on, and what expenses you can avoid. Divide your expenses into categories and allocate a certain amount of money for each category.

Giving up your $4.50 a day Starbucks habit can put $135 into your savings account every month. Does your partner have the same Starbucks habit? When you both break the Starbucks habit you can save $270 a month or an incredible $3240 a year for your home savings account.

See how quickly saving a little here and there can add up? But you have to control that spending. Just think how much you can save at the supermarket if you used a shopping list and only brought what you really need. Not only can you save money quickly but you will probably improve your health by cutting out the impulse items which tend to have too much salt or sugar to be healthy.

Ask the Expert Advice of Your Realtor:

If you are really set on buying a house, perhaps it is best to look for the services of a Realtor. She/he will be able to give you expert advice on the best way to finance your house. Just be sure that you have a trusted and credible Realtor. Keep in mind that generally Realtors work on a commission only basis. Self interest has to be expected in many professions.

Tap Into Family Resources:

Asking family members for help may not be easy but it may be a good way to come up with that down payment. There are now services available on the Internet to make the process easier and safer for all concerned as it formalizes the loan process. Peer to peer financing on the Internet is fairly new but has great promise. Check out Virgin Money (run a Google search) to learn more about it.

The Best Way is to Save:

With the right determination and the right method that is most suited to your saving and spending habits, you will be able to save for a house of your own. It will take some time but perhaps not as long as you first think.

With the housing market currently in a down trend it is a good time to be saving money as you can probably purchase the home of your dreams at a better price a year or two from now than today. Yes, indeed, real estate prices can and do move down as well as up so when buying a home it is best to look at it as a long term place to live rather than as an investment. Over time by being prudent you will pay off your mortgage and be sitting on a valuable asset free and clear.

This may seem old fashioned to some but in a falling housing market the wisdom of not using your home as an ATM machine and using equity as you go along is being sadly realized by those unfortunate homeowners who are losing their homes due to being financially over extended and are now being foreclosed on.

First and foremost your home is a place to live. You should not gamble with your home and perhaps be forced to give it up due to careless financial management.
About the Author
Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at Home Loan Services
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