Now more than ever, saving for a down payment is a crucial step to owning a home.
Right now on Capital Hill legislators, lobbyists, real estate industry experts and others are wrangling over Mortgage Reform and Anti-Predatory Lending Act provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Among the most discussed provisions is one that would create a Qualified Residential Mortgage (QRM), one that will be viewed as a loan offering a lower risk of default.
Because of the low risk, borrowers who qualify for a QRM will pay less than for a mortgage that is not designated as a QRM, but it won't be easy to land the loan.
According to the proposed definition borrowers would have to:
• Put at least 20 percent down to buy a home.
• Have at least 25 percent in equity to refinance.
• Have at least 30 percent equity to do a cash-out refinance.
• Have house payments that don't exceed 28 percent of before-tax income, and total monthly debt payments (house, credit cards, auto, student loans) couldn't exceed 36 percent of before-tax income.
• Not have been 60 days delinquent on any debt payments in the last two years.
For many borrowers, the 20 percent down payment alone could be insurmountable -- without solid saving habits.
First you'll have to change your thinking. A down payment is much more than a quickly gathered percentage of the purchase price. It should be money you extract from existing savings, investments, assets or other savings gathered over time.
Even after you put money down, the lender will want to see that you have enough cash on hand to pay for homeowners insurance, property taxes, homeowner association dues and other costs of owning a home.
Here are some solid strategies to get you started.
• Create a budget. A budget doesn't just reveal where your money goes. It lets you see where you can cut back and divert money into savings.
• Organize. That's right. Sell all that stuff you never use. Sell all that stuff that won't be a good fit for your new home. Clear the clutter. An organized home, with everything in its place, is a time-saving home and time is money.
• Follow a routine. If your money is spent before you get it, you will be less likely to save. Have money deducted from your income and deposited in a savings account with the highest possible interest rate. Don't show favorites because your checking is with one bank. Shop around for Federal Deposit Insurance Corporation (FDIC) insured savings, certificates of deposit (CDs), money market funds, and other savings or investment vehicles.
• Hoard windfalls. Stop spending tax refunds, holiday cash gifts, small lottery winnings and other forms of unexpected money. Save them.
• Withhold less. If you do get a tax refund, it may be time to adjust the money withheld from your paycheck. A tax refund is a free loan to the government. It costs you lost interest it could have earned in a savings account. Adjust your W-4 accurately to reflect your true tax liability. Use the Internal Revenue Service's withholding calculator to get it right.
• Cut back. Some debts are fixed. Others, including groceries, clothing, gifts, gasoline and utilities, are not. Brew your own coffee. Stop eating out. Drive to save gas. Buy generic brands. Get a better cell phone and cable TV plan. The list is endless.
• Dump credit. Likewise, don't live beyond your means. Save credit for emergencies only. Pay off debt. Reducing credit debt gives you money to save and it can boost your credit score.
• Liquidate assets. Saving for a home may be just the reason you've been looking for to unload model train, Beanie Baby, comic book, stamp or coin collections. What's collecting dust in your safety deposit box?
• Get a second job. A few extra hours a day, can earn you a few hundred dollars a month. Consider overtime at your present gig, flipping burgers, working retail during the holidays, working at home or otherwise finding an additional source of income solely for the purpose of saving for that down payment.
Broderick Perkins RealtyTimes.com April 7, 2011