How to Save Money for a House

Saving for a House: A Complete Guide Saving to buy a house involves more than just setting aside money for a down payment. You’ll also need to plan for closing costs, moving expenses, and other upfront costs. While the idea of putting down 20% on a home might seem daunting, you’re not alone if you’re aiming for less. A recent survey found that many first-time homebuyers put down less than 20% on a home. In fact, a significant portion put down as little as 5% or less. For example, on a home priced at $170,000, this would mean a down payment of $8,500 or less. Here are six practical tips to help you start saving for a house: 1. Open a High-Interest Savings Account Maximize your savings by opening a high-interest savings account. Unlike riskier options like the stock market, a savings account offers stable growth with minimal risk. This ensures your savings are protected while earning interest. 2. Automate Your Savings One of the best ways to stay on track is to automate your savings. Set up a recurring transfer from your checking to your savings account, ideally right after each paycheck. By doing this, you prioritize saving and reduce the temptation to spend. 3. Cut Monthly Expenses Look for ways to reduce your monthly spending. Small changes, like canceling unused subscriptions, switching to generic brands, or cooking at home, can add up quickly. You can also lower essential expenses by shopping around for better rates on insurance or utilities. 4. Pay Down Debt Reducing debt can free up more money for savings and improve your ability to qualify for a mortgage. Focus on paying off high-interest debt first, like credit cards. Once you eliminate a debt, redirect the money you were using for payments toward your house savings fund. 5. Boost Your Income Earning extra income can help you save for a house faster. Consider taking on a part-time job, freelancing, or even renting out a room in your home. Every bit of extra income can go straight into your house savings. 6. Track Your Progress Use budgeting tools or apps to monitor your savings and keep you motivated. Tracking your progress helps you stay focused on your goal and adjust your plan as needed. How Much Should You Save for a House? Experts recommend saving up to 25% of a home’s purchase price to cover the down payment, closing costs, and moving expenses. Here's a breakdown: Down payment: Typically 3% to 20% of the home’s price. Closing costs: Plan for 2% to 5% of the home’s price. Moving expenses: These costs can range from around $1,000 for local moves to $4,800 for long-distance moves. For example, if you’re purchasing a $300,000 home, you might need $9,000 to $60,000 for a down payment, $6,000 to $15,000 for closing costs, and about $1,000 for moving expenses. How Long Does It Take to Save for a House? How long it takes to save depends on your savings rate and the price of the home you're aiming for. A recent study showed that renters saving around 2.4% of their monthly income might take 27 years to save for a 20% down payment. However, with a more aggressive savings plan, you could reduce this time significantly. For instance, by saving 10% of your income each month, you could reach a 5% down payment in just two years or a 20% down payment in six years. With the right approach, you can meet your savings goal sooner than you think. By cutting expenses, increasing your income, and staying disciplined with your savings, homeownership can be within reach.

What Are Jumbo Loans?

Securing a jumbo mortgage may be simpler than you expect. This guide will help you understand what a jumbo loan is and determine if it's the right fit for your financial situation. What Is a Jumbo Loan? A jumbo loan, also known as a non-conforming mortgage, is a home loan that exceeds the limits set by Fannie Mae and Freddie Mac. These two entities, established by Congress, help stabilize the housing market by purchasing mortgages that conform to their guidelines, which include limits on loan amounts, down payments, credit scores, and reserve requirements. In 2024, the national limit for a conforming loan is set at $766,550 for a single-family home, but this cap can be higher in certain high-cost markets. Loans that exceed these limits are categorized as jumbo mortgages. When Should I Use a Jumbo Mortgage? A jumbo mortgage is necessary when you're borrowing more than the conforming loan limit in your area. In most places, this means loans above $766,550 will require a jumbo mortgage. However, some high-cost areas have higher conforming loan limits, and you'll need to check your specific location’s limits. Even in these areas, some lenders may still treat any loan above $766,550 as a jumbo mortgage, so it’s important to verify with your lender. Is Qualifying for a Jumbo Mortgage Different? Qualifying for a jumbo loan is similar to qualifying for a conforming loan, but the requirements can be stricter in some areas. Lenders will evaluate your credit score, down payment, debt-to-income (DTI) ratio, and the amount of reserves (cash or assets) you have left after closing. While the credit score requirement is often around 680, having a higher score (780 or above) can help secure better rates. Jumbo loans typically require more reserves than conforming loans, often 12 months’ worth, with half being liquid assets like savings. However, there is some flexibility in jumbo approvals, including: Higher DTI ratios: If you have strong reserves, some lenders may accept a DTI ratio higher than 43%. Flexible income calculations: If you’ve recently started your own business but have a long history in the same field, some jumbo loans may require just one year of self-employment tax returns instead of the standard two years. Low down payment options: You may be able to get a jumbo loan with as little as 10% down, without the need for mortgage insurance. However, rates may be slightly higher in these cases. How Do Jumbo Rates Compare to Conforming Rates? Historically, jumbo loans had interest rates at least 0.25% higher than conforming loans due to the higher risk for lenders. However, in recent years, market conditions have allowed jumbo rates to be more in line with conforming loan rates. Be sure to ask your lender to compare the rates and options available for your specific situation.

Short Sale vs. Foreclosure: Which Is the Better Option for You?

If you're facing financial hardship and can no longer stay in your home, you have two main options: a short sale or foreclosure. Learn which one may be the better choice for your situation. What You Need to Know About Short Sales A short sale occurs when you need to sell your home but owe more on your mortgage than the property is worth. In this case, you can sell the home for less than the loan balance, but you’ll need approval from your lender. To qualify, you must demonstrate financial hardship, like a job loss or reduced income, by providing supporting documentation. Your real estate agent will also need to present your lender with data on comparable home sales in your area. If the lender agrees to the short sale, they must review and approve any offers you receive before the sale can go through. While a short sale does impact your credit, the effect may be minimal if you don’t miss mortgage payments during the process—typically, about a 50-point drop in your credit score. However, if you do have late payments, your score could decrease by as much as 200 points. Getting a new home loan after a short sale can take anywhere from two to four years, depending on your down payment and credit recovery. Some lenders may offer financing options sooner as the lending market has evolved. Additionally, it's essential to consult a tax professional to understand any potential tax consequences of the forgiven loan balance. What You Need to Know About Foreclosures A foreclosure occurs when you stop making mortgage payments and the lender repossesses and sells your home. This can happen whether or not you owe more than the home is worth. Once you miss a payment and enter default, your lender will send a notice of default after 30 days. If payments are not resumed, the foreclosure process will begin, and the lender will ultimately take possession of the property. Foreclosure timelines and procedures vary by state, with some taking longer than others. The U.S. Department of Housing and Urban Development (HUD) offers resources that outline the process in each state. A foreclosure has a more significant impact on your credit score than a short sale, typically causing a drop of 200 to 400 points, as it involves missed payments over time. It can take up to seven years to qualify for a new home loan after a foreclosure, although this period may be shortened if your financial hardship was due to circumstances beyond your control, like job loss. Lenders may be open to working with you sooner, depending on your situation. In both cases, it’s crucial to understand your options and work with professionals to navigate the process carefully.

Cash-Out Refinance: A Comprehensive Guide for Homeowners

Homeowners choose cash-out refinances to tap into their home equity and receive cash in return. Keep reading to learn how this process works and determine if it’s the best option for your financial needs. With the rise in home values across much of the country, many homeowners now have substantial home equity. If you're looking to tap into that equity for home improvements or to pay off high-interest debt, a cash-out refinance could be a viable option. What is a Cash-Out Refinance? A cash-out refinance allows you to replace your current mortgage with a new, larger loan. The difference between the two loans is the cash you can withdraw from your home’s equity. There are no restrictions on how you use the money you take out. As you pay off your mortgage, part of each payment reduces the principal balance (the amount you originally borrowed), building equity in your home. Your home equity also grows if your property value increases. The amount of equity you’ve accumulated determines how much cash you can access with a cash-out refinance. Cash-Out Refinance Example Let’s say you bought a home for $300,000 and owe $200,000 on the mortgage. You’ve built $100,000 in equity. If you want to fund a $30,000 home renovation, you could get a new loan with a $230,000 principal — the remaining $200,000 mortgage balance plus $30,000 in cash. Closing costs are not included in this example. Cash-Out Refinance Closing Costs Closing costs for cash-out refinances range from 2-6% of the loan amount. These costs are typically higher than other refinancing options due to the complexity of the underwriting process. The amount depends on your loan size, term, and credit score. Additionally, certain loan types may have fee caps. For example, conventional loans generally have a 3% fee cap, while FHA and VA loans can have higher costs, up to 6%. To reduce out-of-pocket costs, some lenders offer “no-cost” refinances, where fees are added to your loan balance or interest rate. How Much Can You Take Out with a Cash-Out Refinance? Most lenders require you to keep 20% equity in your home after the refinance. This means your loan-to-value (LTV) ratio can be no more than 80%. Keeping 20% equity helps you avoid private mortgage insurance (PMI) and reduces the risk of owing more than your home is worth if property values decline. For example, if your home is worth $300,000, you must retain $60,000 in equity. The amount you can withdraw depends on your current mortgage balance and your home’s market value. Eligibility for a Cash-Out Refinance Homeowners with conventional or government-backed mortgages may qualify for cash-out refinances. You’ll typically need a credit score of at least 620, a debt-to-income ratio below 50%, and to have owned the home for at least six months (one year for FHA loans). Exceptions may apply in cases of inheritance, death, or divorce. Should You Do a Cash-Out Refinance? If you need cash and have sufficient home equity, a cash-out refinance can be a smart option, particularly if current interest rates are favorable. It’s also a good alternative to high-interest debt like credit cards, allowing you to consolidate debt or finance significant expenses. Alternatives to a Cash-Out Refinance Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against your home’s equity as needed, rather than in a lump sum. Home Equity Loan: A second mortgage where you receive a lump sum and make fixed payments alongside your primary mortgage. The Cash-Out Refinance Process Check Qualifications: Ensure you meet minimum credit score, debt-to-income, and equity requirements. Determine the Amount to Withdraw: Decide how much cash you need, but avoid taking more than necessary to minimize interest payments. Shop for Rates: Compare rates from multiple lenders to secure the best terms. Apply and Lock in Your Rate: Submit a formal loan application and lock in your interest rate. Complete a Home Appraisal: An appraisal is often required to determine the home’s current market value. Pay Closing Costs and Finalize: Once you close the loan, you’ll receive your cash after a three-day waiting period. Is a Cash-Out Refinance Right for You? If you’re looking to access the equity in your home for major expenses, a cash-out refinance may offer an affordable way to do so, especially if you can lock in a lower interest rate.