When you get close to buying a home, one of the biggest steps is making the down payment. You might have a lot of questions about that step, especially if you're a first-time homebuyer. How much is a down payment? How can you afford it? How can it help you in the long-term?
Understanding a down payment is simpler than you might think, and Homeowner Development Manager Pa Lor answers those questions and more in our explainer video. Skip to the timestamps below and read on for quick answers to your questions about putting a down payment on a house.
Associated video: Saving for a Down Payment on a House
A down payment is one of the up-front costs you'll have to pay when buying a home. It's usually anywhere from 10 to 20 percent of the home's total purchase price, though qualified first-time homebuyers can sometimes get a rate as low as 3 or 3.5 percent through their mortgage lender.
A down payment actually benefits homebuyers, too: Because the down payment applies toward the cost of the home, the bigger your down payment, the smaller your loan; the smaller your loan, the less time you'll take to pay it off; the less time you take to pay it off, the less interest you'll accrue. "So by borrowing a little bit less, the overall amount of interest that you pay over time would actually be lower because of that lower amount that you borrowed," Pa explains.
The principles of saving for a down payment are the same as saving for anything else: bring in more than you spend. We know that's easier said than done, so Pa offers some tips for staying on track.
To reduce expenses, you should create a budget. "Essentially, your budget is measuring all of your cash flow coming in on one side and then all of your expenses that are going out on the other side," Pa says. Simple enough – but without a strong, stable budget, Pa says it's easy to imagine you can save more than you actually can.
"A lot of times when I work through budgets with clients, on many of them, when we look at their budgets, there's a lot of excess income," she says. "So it's looking like they should have the ability to save. But really, they don't. So it's looking at what you think you're spending money on, but also what you actually are spending money on.
WATCH: Budgeting Your Monthly Cost of Owning a Home [VIDEO]
Pa stresses that there's no right or wrong way to budget: "It's just kind of looking at what works for you and also being realistic with yourself."
If you've ever tried saving every month, you know it can be hard to consistently put away a lot of money. It's important to set savings goals that are consistent, even if they're not dramatic. Start with an amount you know you can save every month and work your way to a bigger and bigger amount every couple of months.
Increasing your savings goal every so often is "even more rewarding because you're making faster progress towards your goal," Pa says. You may want to put it in a separate savings account, too: "Some clients that I work with find it kind of distracting if they see the money day to day because they'll be tempted to touch it, to use it."
With a solid budget and savings plan in place, the next step is to feed it with a greater amount of income. Here are a few ways you may be able to beef up your income and make quicker progress toward your down payment.
"Sometimes it may take a long time, depending on how much you're trying to save," Pa says. "If you're saving on your own and you're doing 25 or 50 dollars a month, steadily over time ... that may take you a while to reach that three or five or 10 percent of a purchase price."
Fortunately, there are many resources in Minnesota for helping you afford a down payment. Some cities and counties will offer down payment assistance as a way to make it easier for homebuyers to move to their area. These programs can lend you the money you need to afford a down payment on a house, and some even have interest rates as low as zero percent.
In Minnesota, you can use the Minnesota Homeownership Center's Down Payment Resource Tool to find out what down payment assistance programs exist in the area where you're buying a home. Find it at https://www.hocmn.org/dpr-tool/.
Many down payment assistance funds will require you to take education courses geared toward first-time homebuyers before they'll grant you financial assistance. These courses help you figure out things like how big a home you need, what kind of home you can afford, how to choose and work with realtors, and how to improve your credit score to get a good interest rate on your mortgage.
"You may hear the term 'home stretch' thrown around for first time homebuyers," Pa says. "A lot of times lenders and down payment assistance programs will require that you take 'home stretch' or some kind of first-time homebuyer education. So this may be an additional thing to think about, but it will only benefit you and it will prepare you as a first time homebuyer as you go through your home buying process and journey."
At Twin Cities Habitat for Humanity, we're here to help first-time homebuyers through the process of purchasing and owning their new home, including navigating questions about down payments. Find out more with our homeownership resources and if you enjoyed this video, subscribe on YouTube to be notified of new, useful videos!