Should you clean out your savings to purchase a home?
Actually, this is one of the biggest mistakes people can make. Putting too much money down on the transaction is unnecessary and can dramatically deplete your reserves. Having these extra funds is very important since you never know what unforeseen expenses might arise after closing.
Personally, I recommend having two to six months of reserves ready at all times in the event that something unexpected occurs.
It is possible to have this kind of money ready even after your home purchase. There are down payment assistance programs that allow you to put 3.5% or even 0% down on a property. Something most people don’t realize is that every $10,000 you put down on a home only saves you $50 per month.
The true way to save money in the mortgage process is by making one extra payment per year, which will ultimately cut seven to eight years off the lifespan of your mortgage. So, how much should you really spend on a down payment? This is actually something you should discuss more fully with your loan officer. However, if you do qualify for the USDA loan I definitely recommend this option.
The USDA loan requires no down payment, has the lowest interest rates, the lowest mortgage insurance, and therefore has the lowest monthly payment. Not everyone qualifies for this specific option, but there are many other routes out there.
Another thing I advise against is frivolously spending money in savings prior to closing. Even if you don’t plan to spend all of it on closing, you should be careful about touching the money in the savings account you’ve set aside for your mortgage and closing costs.
Having a good idea of what your closing costs will be is also important. Once you’re under contract, your initial loan disclosure will be sent out within three days. There will also be an estimated cash-to-close worksheet that I like to call your “mortgage bible.” This worksheet will detail all expenses that will be associated with closing and with your mortgage.
You will also need to pay your first year of insurance up front. Also, this disclosure package will have a loan estimate. This will discuss all of the terms of the loan.
So what happens if you do come up short at the closing table? Well, gifts are always acceptable. In the event that this happens, you may consider having a family member help out. You can also pull from certain investment accounts. From the lending side, we could also adjust the interest rate and give you a credit to offset the difference.
If you have any other questions or would like more information, feel free to give me a call or send me an email. I look forward to hearing from you soon.