How the heck do you afford a down payment for a house?
December 17, 2019 6:15 AM   Subscribe

I finally have the desire to buy a house and I have no idea how people do this!

A down payment for a house in this area will need to be around $100k and we expect to have $70k at the end of 2020 based on our current saving rates. Assuming 20% down payment required.

This is choosing house basically in the woods and in an "affordable" area for here that also has good schools and you get a lot of house for the money.

We have a car loan with about 3 years left and a monthly payment around $425 that we are paying $600/month. We have minimal credit card debts (a couple hundred that will be paid off end of this month).

It just feels impossible. We've saved for big things in the past (wedding, don't judge me. We did it it's in the past and I'm happy about it.) So i know we can save. But even getting to $70k still leaves us $30k short!

We have a kid (under 2) and we're late 30s. To have another kid, I would like to be in a house. So there's some personal urgency for me since time is running out.

Do I just need to be patient and wait 2 more years to buy a house?
Do you have experience saving a large amount of money in a short time period?
How the heck did you save for your first down payment?
posted by kmr to Work & Money (35 answers total) 24 users marked this as a favorite
Best answer: Many people, and especially first time buyers, don't put down 20 percent is the short answer.
posted by shaademaan at 6:20 AM on December 17, 2019 [55 favorites]

Best answer: You don't actually need 20%. The average down payment is 7% for first-time buyers and 16% for repeat buyers. A down payment of less than 20% means that you'll probably have to get PMI (until you get enough through the mortgage that you have 20% equity) and will likely pay a slightly higher interest rate.
posted by madcaptenor at 6:21 AM on December 17, 2019 [7 favorites]

Have you talked with a mortgage broker? They are adept at laying out your options and talking you through the process. How did we do it? Not by saving 20%. We ended up paying “mortgage insurance” for many years until we refinanced. It’s great that you’ve saved so much but since you are first time buyers, you need someone to help you sort things out and see what kind of programs or incentives might be out there.
posted by amanda at 6:21 AM on December 17, 2019 [2 favorites]

We put down 10% this year. Our credit was excellent; people were happy to lend to us.
posted by Lawn Beaver at 6:24 AM on December 17, 2019 [5 favorites]

For what it’s worth, we only had 10% down payment. This is of course highly dependent on what kind of mortgage terms you are comfortable with but it’s probably worth talking to a mortgage advisor to look at all your loan options If you haven’t done so yet.

“ and a monthly payment around $425 that we are paying $600/month.” Why are you overpaying this payment? If it makes no difference to say, interest being accrued, why don’t you just pay the $425 and now you have almost $200 a month more towards savings. Even if you only aim for 10% for a down payment it’s well worth having cash towards a house purchase for taxes, service fees, inspections, repairs, etc.
posted by like_neon at 6:25 AM on December 17, 2019 [2 favorites]

Assuming you are in the US, you could look into FHA loan which you can put down as little as 3.5% I believe.

Some $ ideas would b second/third jobs (or freelancing), working overtime, putting all extra $ into the savings, temporarily lower retirement account funding, cut out all extras (cable, extra phone stuff, going out to eat, etc.). Ask relatives for no interest loans or gifts (limits on the amounts for this). Move in with parents if you can. Get rid of the car and take public transportation. Do a deep analysis of your spending and work from there. Sometimes you find that it's more feasible to make more $ than to cut expenses.

We are currently paying about $50K per year to get my multiple kids through college. It's been a pain, but we know it's not forever.
posted by jraz at 6:29 AM on December 17, 2019 [3 favorites]

Part of the answer is that a 500k house is not really affordable these days. That may be the going rate where you are, but that doesn't mean it's not a little crazy. In midwestern cities with better cost of living, a fairly nice house runs 2-300k, which is a far different proposition.

Some would also suggest that it's a bad time to be buying, with housing prices up across the board. Of course, no one knows exactly if, when, or how much they'll drop, but looking around my neighborhood, valuations seem sky high right now. If you do the research and also believe that prices are going to fall, you might consider renting for another year or two anyway.
posted by chrisamiller at 6:33 AM on December 17, 2019 [13 favorites]

Assuming you are in the US, you could look into FHA loan which you can put down as little as 3.5% I believe.

We just purchased a condo and qualified for one of these programs. We had to pay closing costs, but the actual down payment on our $350,000 mortgage was less than $10K. If you are a first-time home buyer, definitely worth looking into.
posted by briank at 6:40 AM on December 17, 2019 [2 favorites]

I live in Pittsburgh and I have more than one friend who moved here from other places when they were ready to buy a house, because that was the only way it was going to be feasible for them. We've got a really reasonable housing market here (though still more expensive than it was a decade ago) and sometimes that's the real (if difficult) answer: you can't buy where you are, and have to go where the market you can afford is, if owning a house is worth that for you.

From our own experience, our answer was the reasonable cost of housing here, family assistance, and also the FHA loan. I don't remember how much we put down in the end because we went back and forth on it a bit, but it was definitely under 20% and we paid mortgage insurance for several years as a result.

It sounds like it would be well worth having an initial conversation with a mortgage broker about the different scenarios and types of loans you might be eligible for.
posted by Stacey at 6:46 AM on December 17, 2019 [1 favorite]

Best answer: Hey, @kmr. Long-time mefite here and full-time money writer. I'm not going to answer your question directly -- "how do people save for a down payment?" -- but am going to address some obliquely related issues that I hope will help you with your finances in the future.

First, there are a variety of ways to buy a house with a down payment below 20%. That 20% guideline is more for the borrowers than anything. If you, as a homebuyer, make a large downpayment, you're using less leverage, you're borrowing less. This gives you a better chance of avoiding financial problems in years ahead.

Second, it's important to understand that there is a vast real-estate industrial complex, and every piece of that machine will try to convince you that you should buy a more expensive house. Don't do it. You'll hear all sorts of things like:
  • "Buy as much home as you can afford." This is bullshit. Buy as little as you can possibly get away with.
  • "Renting is throwing your money away." Also bullshit. Whether or not it's better to rent or buy is contingent on many factors. Generally speaking, it's a toss-up. I hang out with a lot of millionaires (for real). Many of them have sold their homes and opted to rent instead.
  • "Your monthly payments can be up to X%" where X might be anywhere up to 43% of your income. (I'm not actually sure what current debt to income guidelines are. I haven't looked in many years.) Again, bullshit. The closer you come to the edge of this limit, the tighter things will be for your budget. In the olden days, when the world was young, the guideline was that your housing payment should be no more than 25% of your income -- and lower was better. If you can keep housing expenses under 20% of your budget, you'll set yourself up for success.
There are more gems, of course, but you get the idea. The key point to realize here is that everyone in this process -- from the realtor to the mortgage lender -- has a vested interest in getting you to spend as much as possible. You are the only one who has your best interests at heart. I'm not trying to be cynical here; I'm trying to be pragmatic. It is up to you to be your own advocate, to stand up and say, "No, we need to look at cheaper options."

My standard advice for prospective homebuyers is this:
  • First, decide whether you should rent or buy. Why do you want to buy? What are your motives behind it? "Because that's what people my age and in my situation do" is not a good answer. Why do you want to buy? Might renting be a better alternative?
  • Second, set a budget. Base this budget not on what the real-estate industrial complex says you can afford but on what you know you can afford. How much are you paying for housing now? Does that amount hurt? Does it feel comfortable? Remember what I said above: Generally speaking, people are much happier (and have greater financial success) when they're able to keep their housing payment (PITI) below 25% of their budget -- and lower is better.
  • Once you've set your budget, stick to it. It is very very tempting as you look at houses to start viewing homes that are "a little" out of your price range. Your real-estate agent will actively encourage this. Be firm. Set a budget and stick to it. Make this a logical decision, not an emotional one.
  • As you start to actually search for homes, be patient. Set up filters on Redfin (or wherever) that include your parameters, including price. Spend weeks (better, months!) watching to see what becomes available. This will help you stick to your budget, but it'll also give you an idea of what the market is like.
  • Don't buy into the big-home hype. Home sizes have ballooned in the past fifty years. But a bigger home costs more to maintain, more to heat, more to furnish. Like many folks, I've downsized. I've moved from 1800 square feet (which is considered small by many people today) to 1600 square feet to my current house, which is 1200 square feet. There are valid reasons for owning a larger home, but these are uncommon. Most folks would be better served by something smaller.
If I were you, I'd form a long-term plan for buying the house. You say you have about three years of payments remaining on the car. If you decide that buying a home is the correct move for you and your family, maybe have a three-year goal for the purchase. Once that car payment is gone, that gives you even more breathing room in the monthly budget, right?

Whatever you choose, I wish you well. Just remember to keep your needs and goals in mind at all times. Remember that you need to speak up for yourself during this process. If you're ever uncertain, if you ever have questions, don't sit silent. Be vocal. Nobody cares more about your money than you do...
posted by jdroth at 6:51 AM on December 17, 2019 [210 favorites]

You might qualify for an FHA loan or there's a chance your state might offer something similar to an FHA loan. (In my state it's called a WHEDA loan).
posted by drezdn at 6:54 AM on December 17, 2019 [1 favorite]

I just used a mortgage broker who found a first-time homebuyer program that allowed me to put less than 20% down and still get a really good interest rate. It means I'll be paying PMI for a while, but you can drop the PMI early if you make extra principal payments, so if you buy a small/cheap enough house that you can make extra principal payments it's worth it.

And a lot of credit unions offer no-PMI mortgages with <20% down payments. They're usually either variable-rate or <30 years, though. Mortgage brokers don't usually deal with credit unions so you'll have to investigate those options on your own.
posted by xylothek at 6:59 AM on December 17, 2019 [3 favorites]

Read jdroth's comment. Read it several times.

Shop for your mortgage pretty aggressively. Check out a credit union, check online. You can get pre-qualified; then you'll know what you can buy. Rates are still quite low, lending is not tight. I bought my 1st house when mortgage rates were very high, lending was very tight. Pre-spreadsheets, so I had a mortgage amortization book to calculate payments. Good times. Check out your credit so you can fix minor dings.

Budget for the expenses of a house. Maintenance, repairs, insurance, heat, AC. Smaller houses generate less expense, and with Climate Change ramping up daily, pay close attention to sustainability, insulation, good windows, etc.
posted by theora55 at 7:00 AM on December 17, 2019 [8 favorites]

FHA loan limit for 2019 is $726,525. so you should be able to get a 500k house. I don't know where you are, but know the cost of housing is very high in some places. Just don't buy too much house.
posted by mareli at 7:27 AM on December 17, 2019 [2 favorites]

It would be worth your time talking to a few different real estate agents as well as their recommended mortgage brokers to get a strong sense of the dollar amount you’ll want to save. The broker will be able to take the amount you want to pay each month in mortgage (and taxes!) and your financial information and pinpoint exactly what you’ll need to put down. The real estate agent can help fill you in on the cost of the agent commission and other closing costs (which can tack on $10-20K if I remember correctly). That gives you a specific saving goal and a solid range of home prices to shop within. I’m in a very tight real estate market and am an extremely picky buyer, and honestly, spending the past year browsing on Redfin has benefited me by giving a sense of what’s priced fairly versus not, what I’m willing to compromise on, and the general status of the market. It depends where you are but it might be smart to wait a couple years to buy anyways—it feels like the housing market is in a weird place right now.
posted by sallybrown at 7:40 AM on December 17, 2019 [2 favorites]

You can get pre-qualified;then you’ll know what you can buy.
Be careful with this. There’s a big difference between the amount banks will lend you versus what you can afford to spend. Understanding that concept is huge.
posted by bookmammal at 7:44 AM on December 17, 2019 [15 favorites]

Like everyone we know who didn't have family money, we put down way less than 20% when we bought our first house. Having 20% in hand was just not realistic for us and we weren't even in a crazy expensive housing market. You are far ahead of where we were at that time, so you should have plenty of options.

But I also agree with everyone saying to move a bit slowly. The housing market feels weird, and spending more time assessing your options can help when you are ready to make the move.

I'd also suggest spending some time with the rent vs own calculators (the NY Times has a particularly good one) and seeing what the impacts are of making pessimistic vs optimistic assumptions about appreciation, costs, and so on.
posted by Dip Flash at 7:49 AM on December 17, 2019 [2 favorites]

We put 10% down and I was worried about PMI but it was only $60 a month and we got rid of it when we refinanced a year into our mortgage. There are some really good services that shop brokers for you nowadays - we used OwnUp but there are others. We were saving really aggressively and we both receive high salaries and we had basically no debt ($2k in student loans) but it’s still damn hard to accumulate tens or hundreds of thousands of dollars as working people (even if we’d cut our housing costs to actual $0 that still would only have saved us another $30k a year!).
posted by mskyle at 7:56 AM on December 17, 2019 [2 favorites]

We saved for 8 years in Chicago while renting. We bought in St. Louis where it is cheap. We also bought MUCH less house than we were "approved" for because I thought that amount was ridiculous.
posted by Ms Vegetable at 8:26 AM on December 17, 2019 [6 favorites]

Nthing the credit unions. Some offer mortgages for as little as 3 percent down if you look around and have good credit. But always buy something much cheaper than what you're qualified for. It's slower than going through a mortgage broker but almost always a better long-term deal. Also — most experts agree that a homeowner should expect to spend at least 1 percent of their home's value each year on repairs and general maintenance. If it's a fixer-upper, even more. And look ahead to a future with more expensive housing and aging parents/adult children in need of a place to stay. Is there room/zoning for an accessory dwelling unit? It's in many of our futures so plan ahead.
posted by caveatz at 8:36 AM on December 17, 2019 [2 favorites]

I saved for my house via a regular investment account that I started when I was 21. I also suggest finding your own house because realtors for some reason love to guide you to what they want instead of what you want. It's crazy. Also get a pre-approval. It'll give you a ceiling on how much you can afford, and if you do need to save up more. Good for you on paying down your car. That's smarter than spending less on a mortgage.
posted by The_Vegetables at 8:44 AM on December 17, 2019 [2 favorites]

For lots of upper-middle class people, the answer is inherited wealth - a grandfather left them a little nugget, or their parents set up a Schwab account for them and contributed a bit here and there over the years. Or their family paid for their undergraduate degree (and also their cell phone and car insurance and flights home at Christmas until they were in their 30's... "just let us do this for you, our parents helped us when we were your age..."). This is also inherited wealth - but we don't think of it that way unless somebody croaked first. There's an interesting book "The hidden cost of being African-American - how wealth perpetuates inequality" that describes how the use of "transformative" assets basically puts upper-middle class people on second base while the rest of us swing the bat for ourselves. Those transformative assets come in to play in college, in house down-payments, in cushioning the blows of unexpected life events like divorce.

Also - my progressive friends look at me as though I grew a Republican head when I bitch about property taxes - but it is a significant annual expense and one way to pay less in property taxes is to buy less house. This is an annual, ever-increasing amount that you lock yourself into on day 1 - be mindful of it when making your choices about where to live. The difference between 1.1% and 1.9% on an assessed value of $500k over the course of decades is real money.

I've also noticed among my more progressive upper-middle class friends that their house purchase is more about their identity - having a house that matches their class identity - than having a house that suits where they are and can expect to go financially. Like - they're fine driving economy cars and thrifting clothes because they don't attach any cultural value to fancy cars and nice clothes - but they have this total blind spot when it comes to housing. Like the number of bathrooms or whatever is who they are in society or something.

Anyways, with $70k on hand and decent incomes you can find a way to buy a $500k house. Just call the bank and you'll be on your way ;)
posted by everythings_interrelated at 8:45 AM on December 17, 2019 [16 favorites]

A friend of mine just bought a place and used something I didn't know was possible, a 401k loan. Apparently you can borrow up to 50k of your 401k to help with a down payment and he said the cost was pretty low as long as you pay it back within 5 years. So this may be a option if PMI isn't and you have a good 401k
posted by JZig at 8:49 AM on December 17, 2019 [2 favorites]

To address your question, it's easy: you borrow more than 80%. Like you, we were conservative and put down almost 20%, and dropped PMI the minute we passed that threshold. Our mortgage guy, Ryan, was happy to work with us each time: it's his job.

When theora55 writes, "Budget for the expenses of a house," HEED THIS.

No matter how new and modern you house is, you'll be spending money like crazy the first year. Some of it goes to stuff you didn't need to own before (snow rake? Whaaaa?) and some of it will go to repair and/or finish the house itself.

Our line was that we didn't leave a big-box store without spending $100, no matter how few/cheap things we went in for...and we went all the damn time.
posted by wenestvedt at 8:50 AM on December 17, 2019 [5 favorites]

How the heck did you save for your first down payment?

I bought a house in rural Vermont (including 40 acres of land) which cost about what your down payment nest egg is currently at. Most of the people here I know who buy their first houses put down less than 20% and often get FHA loans or maybe a temporary loan from a family member (I had the family equivalent of "bat mitzvah money" which helped me out a little) which they pay back at a low-to-no interest rate. I rent now, after selling my house which had appreciated 30% and renting is GREAT
posted by jessamyn at 9:27 AM on December 17, 2019 [2 favorites]

I've bought three houses over the years and never put much down as a downpayment. We rolled most of the closing costs into the loan.
posted by octothorpe at 9:41 AM on December 17, 2019 [1 favorite]

You may not have shared other reasons, and that's fine, but in your question the only reason you have for investing tens of thousands of dollars in single-detached residential real estate (other than your "desire" to) is:
We have a kid (under 2) and we're late 30s. To have another kid, I would like to be in a house. So there's some personal urgency for me since time is running out.

There are 76 million single family detached houses in the United States, and 12 million of them (about 1 in 6) are occupied by people renting those houses. There are millions and millions of people who live in a house because they value some lifestyle aspect of living in a house but who have not, or do not want to, put a down payment into their housing. The physical form your housing takes is not inextricable from the financial form your housing has.
posted by Homeboy Trouble at 9:44 AM on December 17, 2019 [8 favorites]

I would either pay the car off fully or as slowly as possible depending on how long you're willing to wait. It sounds like you are motivated to buy soon, so reduce what you pay to the minimum and add the extra you're paying each month to your downpayment fund. However, if you can wait it would be better to take a chunk of that down payment you've saved and just pay off the car. That should free up whatever you would have paid in interest over the next few years to also go into saving for the house.

A word of caution about the 401K loan idea. If you lose/change a job, you have to pay that back right away. If you lost a job because there's a recession and so your house is 10% less than what you owe on it that means you may not even be able to sell or refinance the house to cover what you have to pay back to the 401K so keep that in mind.
posted by willnot at 11:34 AM on December 17, 2019 [4 favorites]

The physical form your housing takes is not inextricable from the financial form your housing has.

If you are interested in owning a home, have the capital to do so (and $70k even if it's not 20% is the capital to do so), and are buying in area that requires close to 6 figures for the down payment, and are stable enough to live there for a solid 7-10 years, then ownership is a good idea even if you can't exactly illustrate your personal 'why'. Ownership acts as an rent cost inflationary hedge in these places, and it prevents gentrification (where gentrification = have to move at the whims of someone else), and though it's not the best way to save, it's a pretty good way to save a large chunk of money. I mean where else are you going to get someone to give you $500k for 3% for 30 years?

This doesn't make renting bad, but it's not a equal equation either.
Borrowing from your 401k is a terrible idea, don't do that unless you are desperate.
posted by The_Vegetables at 11:37 AM on December 17, 2019 [2 favorites]

Best answer: I was able to afford the downpayment on my first house through the simple expedient of getting hit by a truck and using the settlement money. I don't recommend this method.

For my second house, I made enough from the sale of the first house that I easily could have put down 20% (or more), but mortgage interest was so low there was no reason to tie up money in the house when I could invest it and expect a higher rate of return. I took out what's called an 80/15/5 mortgage, so I was only paying mortgage insurance on 15%. And I was later able to refi that away.
posted by adamrice at 12:36 PM on December 17, 2019 [4 favorites]

Don't assume you will be able to sell the house you buy for more later. The housing market used to be thought of as a guaranteed equity-generator, but there are no sure things. If people knew a crash was coming, that would just make it come sooner--market adjustments (heh) are always a surprise.
posted by rikschell at 2:17 PM on December 17, 2019 [2 favorites]

Yes, for example Las Vegas is still below its high median price of 2006 (so if you bought in 2006, you'd still be losing money on a sale 13 years later, and thats without adjusting for inflation).

On the other hand, even if you bought at the height of the 2006/2007 bubble in Los Angeles or San Francisco, you'd have substantial appreciation now.

Housing markets are incredibly local (for fairly obvious reasons), and as always past results don't tell you much about the future. Overall economic and migration trends can give you some idea (its less likely LA or SF will have a decade+ downturn like Vegas, because demand is still very high and incomes are still high), but it's never a sure thing.

(The same is true of, say, stocks --- but unlike stocks, you are often forced to sell a home at an inopportune time if you need to move / change jobs / etc, so the risk is a little higher)
posted by thefoxgod at 3:09 PM on December 17, 2019 [1 favorite]

Keep at least $20k of that estimated savings tucked aside to help cover closing costs and moving costs and that thing that breaks 5 weeks into your homeownership and costs $8k to fix. There is always something that breaks.
posted by current resident at 8:00 PM on December 17, 2019 [2 favorites]

jdroth's entire comment is very on-point, but especially this:

"Buy as much home as you can afford." This is bullshit. Buy as little as you can possibly get away with.

We've never paid more than 20% of our income in rent or mortgage + property tax, and boy has it been helpful. I'll admit it's partly because we're very fortunate, but the fact remains that cheaper house means a smaller down payment and more money for literally everything else in your life.
posted by Tehhund at 8:39 AM on December 22, 2019 [1 favorite]

Furthering jdroth, but also a few more suggestions - look at what is available to rent, and find out if you can rent with an option to buy in, say, 12 - 18 months. Often you can negotiate a discounted rent, and it gives you the option to check out a property before you commit.

Especially if you are moving to a different neighbourhood - 6 months of renting, and you change your mind - no biggie. But if you buy and then change your mind, the costs of buying and selling are far greater than 6 months rent.

And switch it the other way too. If you find your dream home, ask to rent it for 6-12 months at a discounted rent so that you can save up more of a deposit.

My warning to new home buyers - "the first twelve months are the WORST twelve months." As a tenant, there are costs which the landlord has dealt with, which you now have to cover. And as an owner, every weekend seems to involve another visit to the hardware shop.
posted by Barbara Spitzer at 3:04 PM on January 6, 2020

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