Home > Mortgages > Saving for a House: It’s More Than a Down Payment

Comments 0 Comments

It’s easy to get caught up in credit scores when considering a home purchase. But as lenders continue to loosen requirements, the need to have money in the bank doesn’t get any less acute.

Getting prescriptive about how much you need in savings to satisfy a mortgage lender is tough business. The answer can depend on a host of factors, from the type of mortgage and size of the loan to the property itself and more.

You’ll most likely need a solid chunk of change upfront to cover a down payment and closing costs. Lenders might also want to see a stockpile of “reserves,” which often translates to a certain number of months’ worth of mortgage payments.

The bottom line is that it’s tough to talk specifics about your bottom line. That’s why it’s important to get a solid understanding of your mortgage options and seek clear guidance from lenders.

Credit scores are critical, but so are income and assets when you’re applying for a home loan. Here are some of the important savings you’ll need to accumulate first.

Down Payment Needs

Down payments are inescapable for the vast majority of non-cash homebuyers. Outside of state or local programs, only government-backed VA and USDA rural development home loans allow qualified borrowers to purchase with no money down.

Conventional and FHA loans typically require minimum down payments of 5% and 3.5%, respectively. On a $200,000 mortgage, that’s $10,000 for conventional and $7,000 down for FHA. But buyers often put even more skin in the game.

Conventional borrowers last month had an average loan-to-value ratio of 80%, according to mortgage software firm Ellie Mae. For FHA loans, it was 95%. That means buyers are putting down an average of 20% for conventional loans and 5% for FHA loans.

Existing homeowners often have an advantage because they’re able to put the proceeds of a home sale toward a new purchase. It can take first-time buyers years to scrape together enough money for a down payment.

That’s partly why home sales among first-time buyers hit their lowest point last month since the National Association of Realtors began tracking the figure in October 2008.

Reserves

Paying the upfront costs of homebuying represents one pool of money. Lenders want to make sure you’ve got plenty left over to keep the monthly payments rolling in long after closing day.

One way they hedge risk is by requiring a certain amount of reserves. Guidelines can vary by lender, loan type and borrower. One month of reserves is usually equal to your monthly mortgage payment, including property taxes and insurance.

Conventional lenders typically seek from two to six months of reserves, but it could be as many as a year’s worth, depending on your risk factors.

Neither FHA nor VA loans have a reserve requirement for single-family homes. But purchasing multi-unit properties under these programs typically requires three to six months’ worth of reserves. Reserve requirements will also vary for jumbo loans.

A healthy amount of reserves can help homebuyers on the edge. Lenders can consider these assets as a positive compensating factor, which can help a spotty loan file overcome credit or debt issues and help the mortgage process move along faster.

Residual Income

Lenders will take a close look at the ratio of your major monthly debts against your gross monthly income. This is known as debt-to-income (DTI) ratio, and different loan programs have different requirements.

Money-wise, it’s not just the income stream some borrowers need to worry about.

Some lenders and loan types may require you to have a certain amount of money left over each month after paying major expenses. The VA loan program has pioneered this requirement, known as residual income. VA borrowers must meet a monthly residual income benchmark that can vary based on where you live and your family size.

For example, a family of five in the Northeast needs at least $1,062 left over each month after paying those major bills (think mortgage, student loan, child care).

The FHA recently adopted the VA’s residual income requirement as a test for borrowers with higher debt-to-income ratios. The change takes effect in late April.

Residual income doesn’t necessarily represent funds you need to earmark for savings. But knowing how to budget and save are key traits of successful homeowners.

While you save for a home loan, it’s important to make sure you’re maintaining or building good credit so you can qualify for the best rate possible. You can pull free credit reports every year from each of the major credit reporting agencies to see your full credit history. Also, the Credit Report Card is a free tool that gives you two of your credit scores and a breakdown of what’s impacting your scores.

More on Mortgages and Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team