Q: I would like to buy a home right now. This seems like a really basic question, but I’m not sure whether it’s better to wait and save the 20 percent down or to just buy with the minimum 3.5 percent downpayment? I feel like if I save the 20 percent downpayment, it won’t be a buyer’s market by the time I have the money.

A: The decision as to when to buy (or sell, for that matter) to best take advantage of market dynamics faces every real estate consumer.

I generally advise buyers and sellers to make their real estate moves at the time that makes the most sense for their lives, rather than trying to time the market at all.

Q: I would like to buy a home right now. This seems like a really basic question, but I’m not sure whether it’s better to wait and save the 20 percent down or to just buy with the minimum 3.5 percent downpayment? I feel like if I save the 20 percent downpayment it won’t be a buyer’s market by the time I have the money.

A: The decision as to when to buy (or sell, for that matter) to best take advantage of market dynamics faces every real estate consumer.

Mindset Management

I generally advise buyers and sellers to make their real estate moves at the time that makes the most sense for their lives, rather than trying to time the market at all. Smart buyers and sellers use what’s going on in the market to direct their specific strategies for executing their real estate decisions (e.g., how much to offer for a home, or how much to price their home at), whenever it is that they decide to make a move.

The upshot of this general rule is that your buying timeline and strategy should be custom-tailored to your life. Don’t tailor your life to the market — if you’re ready and want to buy now, get a professional’s personalized assessment of what purchasing power you have now. A good mortgage professional will also help you create a savings target and action plan in the event your current resources aren’t sufficient to buy the sort of home you want and need.

Need-to-Knows and Action Plan

The amount of money you have at your disposal for cash to close (downpayment and closing costs) is only part of the total financial picture of your home purchase. That number interacts with your credit score, interest rate, property taxes, monthly mortgage payment and purchase price (among other things) to create the holistic financial snapshot of what buying a particular property at a particular spot in your process of saving downpayment money.

Without this holistic snapshot, you’ve got nothing more than someone else’s general rules of thumb on which to base your decision. One person might say you should never buy with less than 20 percent down; another might advise you to buy as much as you can as soon as you can scrape up the minimum 3.5 percent downpayment for an FHA loan.

Neither piece of advice is right or wrong for every homebuyer. The fact is, you need this holistic snapshot in order to make a decision that makes sense for you. …CONTINUED

Your first step should be to get clear on how much you have at your disposal right now and how much you feel your current monthly budget can bear in terms of the total cost of owning your home.

Then, find a reputable mortgage broker, preferably by referral from family members, colleagues, friends, or even a trusted local real estate broker or agent. Work with them to determine if your current savings would be a sufficient downpayment to make any sort of realistic purchase in your market. If so, allow your mortgage broker to run your credit — a key step of the troubleshooting phase in any serious real estate transactional planning conversation — and analyze your income, assets and other mortgage application details. Then, tell them what you would like your maximum monthly housing costs to be, and ask them to provide you with some alternative scenarios:

  • with X, Y and Z dollars toward your downpayment (and closing costs, if they’re not normally paid by the seller in your area), and
  • a maximum total monthly ownership cost (mortgage principal, interest, property taxes, insurance, mortgage insurance and homeowners association dues, if applicable) of the amount you came up with earlier, and
  • what purchase price can you afford to pay for a home.

Then, connect with a local broker or agent (again, by referral), and ask them to show you homes at the price range you could afford to pay with what you have saved right now. Do a gut check — could homes similar to this work for you? Keep in mind that your first home need not be your dream home — you might want to save that for your next purchase (or the one after that!).

If the homes you see in this price range aren’t even close to fulfilling your housing needs, you might need to keep saving. But this analysis is not strictly an either-or, 3.5 percent or 20 percent proposition. Perhaps 5, 10 or 12.3 percent is the magic downpayment amount that will get you into a home that will work for you at the price you can afford. That’s how you’ll make use of the various downpayment/monthly payment/purchase price scenarios your mortgage broker put together for you.

You are smart, though, to keep in mind that prices generally will tend to inch up over time, and many buyers find that the inflation in home prices — even in today’s market — outpaces their ability to save up funds toward their downpayment.

Also, don’t neglect to factor in how important it might be to take advantage of the tax credit (assuming you qualify for it). In about 17 states, you can use it toward your downpayment up front; everywhere else, you might have to wait until after closing to obtain the funds, but at that time you could use them to bring down your loan balance if you so choose.

If you have the financial discipline to apply your tax credit in one of these two ways, by getting into contract prior to the April 30, 2010, deadline you can essentially gain an instant downpayment boost equivalent to the credit amount you qualify for, up to $8,000.

If you choose to wait to save up 20 percent, you might have to save up an additional $8,000 to get to the same spot as if you bought in time to obtain the tax credit. That doesn’t mean you should rush out and buy something right now to get the tax credit; it’s just another relevant data point that you should factor into this important decision.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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