Four Ways To Save For Your Deposit
First-time buyers share their tips
Looking to buy your first home but struggling to save for a deposit? From reducing rent to getting savvy with savings, there are ways to make it easier.
It can be a real slog saving up to buy your first property, so we asked a few first-time buyers to share their advice on what helped them get a foot on the ladder.
Apply For A Home Loan
We have mortgage brokers with extensive experience in financing property purchases for people who dont have genuine savings.
We can tell you if your deposit will be considered as genuine savings, whether you can use your rental history or whether you can qualify for a loan without genuine savings.
Please call us on 1300 889 743 or complete our today!
Simple Tips To Help You Reach Your Savings Goal
Taking the first steps towards saving can sometimes be difficult. Here are a few easy tips to get you saving for your new home.
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Consider A Help To Buy Equity Loan
If you’ve saved up a 5% deposit but aren’t able to borrow enough to buy a property in your chosen area, a Help to Buy equity loan from the government could help.
How does it work? You put down a 5% deposit, the government loans you a set amount of equity, and you take out a mortgage on the remaining amount.
The size of government loan differs depending on where you live: it’s 40% in London, 20% in the rest of England, 15% in Scotland and 20% in Wales. The loans are only available on new-build homes.
There are pros and cons to taking out a Help to Buy equity loan so read our guides to find out more.
What Other Restrictions Apply
In order to get approved with a lender that doesnt require genuine savings, there are certain restrictions that may apply.
If you have no genuine savings or youre not sure, speak with us first before applying with a bank directly.
Although some lenders specialise in no genuine savings, the tradeoff is that they tighten other lending rules.
As a general rule:
- No genuine savings home loans are usually only available for buying a home, not for investment.
- Not available when purchasing vacant land or constructing.
- Max land size with most lenders is 2.2ha.
- Properties in small towns or remote areas may not be considered.
- Your ratio of your net disposable income to your total debts should be at least 110%.
- Youll only be able to borrow up to 95% of the property value up to $650,000 as opposed to $1 million if you had genuine savings.
Dont meet the above policy?
Call us on 1300 889 743 as we may have other options available. Genuine savings policies are complicated and there is no one size fits-all solution.
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Start Saving For A Deposit
One you know how much you need to save, you need to think about where youll save it.
You might already have a bank account that lets you set up a separate pot for your financial goals, or another savings account you could use for this money.
If youre going to be saving for a long time, you should think about how much interest you could earn on this money.
An instant access savings account might seem convenient. But they often pay a lower rate of interest, and if you wont need the money for a few years, you dont need to get at the money straight away. So you might want to look at a longer term savings account which pays you more interest.
Find out more about how to choose a savings account
Opening a Lifetime ISA if youre a first time buyer under 40 could give you a 25% boost on your savings. For example, if you put £1,000 into your Lifetime ISA, the government will add an extra £250. This would leave you with £1,250 at the end of the tax year.
Read more about Lifetime ISAs in our guide Lifetime ISAs how they work
Setting up a regular standing order to automatically transfer money into your savings account can help you save even faster.
Find out more about Direct Debits and standing orders
Money Saved For A Down Payment Or Closing Costs Doesn’t Count
Maybe you were required to save a down payment of 5 percent of your home’s purchase price. If you are buying a home that costs $200,000, that comes out to $10,000. If you’ve saved $10,000 to cover this, your lender won’t allow you to count it as part of your savings reserve.
Closing costs are expensive, too. Say yours run $3,000. Unless you can convince the sellers to cover these costs, or get them rolled up into your mortgage loan, you’ll need to save these dollars separately, too.
It’s easy to forget when buying a home that mortgage lenders want to see additional savings beyond the typical down payment and closing costs. This is why it’s so important to work on building a large cash reserve before taking the plunge and applying for a mortgage.
Should I Invest To Save For A Mortgage Deposit
If youre saving for a mortgage deposit, you may feel tempted to invest your money in the stock market rather than saving it in a traditional savings account, but this can be very risky and is also more suitable for long-term financial goals.
With any investment there is always the risk of losing your money, and to have that happen while youre saving for a house could be a major setback. For this reason, its probably best to consider savings accounts over investing.
What Is The First Home Savings Account
The First Home Savings Account is a tax shelter proposed by the federal government in the 2022 budget to help Canadians save money to buy a first home.
This tax-free home savings account will combine the features of two savings plans you might already be using: the Tax-Free Savings Account and the Registered Retirement Savings Plan . Just like your RRSP, contributions to your FHSA will be tax-deductible. This means that any amount you put in your account will be deducted from your taxable income, saving you money on your income tax.
As with your TFSA, any money your FHSA earns will be tax-free. You wonât have to report your investment earnings or pay income tax on them.
The FHSA will have a few advantages over the RRSP. Itâs intended specifically as a savings tool for a down payment on a first home, so you wonât have to use up RRSP contribution room to take advantage of the tax savings. And whereas you have to pay yourself back when you withdraw money from your RRSP to buy a first home, your FHSA withdrawals wonât need to be repaid.
Under the proposal, FHSA contributions will be limited to a maximum of $8,000 per year and $40,000 over your lifetime.
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What Are Cash Reserves
Even if you have plenty of income to meet your loan obligations, your lender wants to feel confident that you have enough cash on handor in reserveto pay your mortgage in the event you lose your job or experience a decrease in income.
Money in a savings or checking account qualifies as cash reserves, of course. However, lenders will also accept anything liquidmeaning it can quickly be turned into cash if necessary. This includes things like:
- 401s, IRAs, and other retirement accounts
- Life insurance policies
Lenders dont consider your car, or another property you own, as part of your reserves since they cant easily be converted into cash. What if your jewelry collection is worth five figures? Sorry, it wont helphousehold belongings also dont qualify.
Do You Qualify For A Mortgage Loan
Bank statements are just one of many factors lenders look at when you apply for a mortgage.
Almost all areas of your personal finances will be under scrutiny including your credit score and report, your existing debts, and any source of income youll use to qualify for the loan.
These factors help determine how much house you can afford, your loan amount, and your interest rate. The cleaner your financial situation looks across the board, the better deal youre likely to get on your new home loan or refinance.
Why It Pays To Save
- Better interest rate. The bigger your deposit the better your loan to value ratio . So, if your deposit is more than 20%, you could get a discounted rate for the first year with our First Time Buyer Mortgage.
- Shows consistency. Mortgage providers usually want you to show between 6 and 12 months’ continuous regular savings. This means no dipping in and no little breaks!
The Four C’s Of Credit
Veteran lenders often refer to character, collateral, capacity and capital as the “four C’s of credit.” Lenders evaluate your character by checking your credit report to see if you have a good history of repaying your debts. Your collateral is the home you want to finance and your capacity to repay the loan is based upon your income level minus your existing debts. You normally can’t get a loan unless you prove you also have capital or cash to cover the closing costs and the down payment. Lenders also like to know that you have a little cash stashed away for a rainy day in case your income source suddenly dries up. If you don’t have any money saved, then your chances of getting a loan are greatly reduced.
What Is A Good Savings Plan
A good savings plan is one that allows you to identify which financial goals are most important to you, prioritize those goals, and achieve them in a time frame that you prefer. Every savings plan is different based on what you hope to achieve with your money, how long you have to save, and how much you can afford to commit to savings.
Federal Reserve Bank of St. Louis: FRED Economic Data. “Personal Saving Rate.”
How Much Do You Need In Cash Reserves
The exact amount of cash reserves youll need will depend on your loan type, your credit score, and the amount of your loan versus the purchase price, or the loan-to-value ratio. In most cases, though, lenders will want to see at least a few months of housing payments in liquid assets. The lower your credit score, the higher the reserves a lender will want you to have available.
Keep in mind that the full payment includes the portions that go toward your home loan’s principal balance, interest, taxes, and insurance. In some cases, it may also include dues for your homeowners association, mortgage insurance premiums, or payments on second loans.
Use the mortgage calculator below to get a sense of what your monthly payment could end up being.
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Mortgage Offers Can Help You Save
There are several national and state programs that can help you save money on your mortgage. Spend time researching what you qualify for, as well as what restrictions apply, to see if you can get a better deal.
Many state and local governments offer first-time homebuyer programs which encourage residents to buy within their home state. The Energy Efficient Mortgage program is ideal for people looking at green homes, while FHA 203 loans might suit you if you want a fixer-upper. If you’re buying in a rural area, see if a U.S. Department of Agriculture loan may be right for you. Veterans or active-duty servicemembers, or members of the Guard or Reserve, may be eligible for a VA loan which can help save them money with low or no down payment options and no mortgage insurance requirements.
Find A Mortgage Lender
Once youve decided on the type of mortgage, its time to find a mortgage lender. Its important to shop around for multiple offers to make sure youre getting the best possible deal, not just the lowest interest rate. Be mindful of the lender fees when evaluating your options.
To find the right lender, speak with friends, family members and your agent and ask for referrals, advises Guy Silas, branch manager for the Rockville, Maryland office of Embrace Home Loans. Also, look on rating sites, perform internet research and invest the time to truly read consumer reviews on lenders.
decision should be based on more than simply price and interest rate, says Silas. You will rely heavily on your lender for accurate preapproval information, assistance with your agent in contract negotiations and trusted advice.
Remember that interest rates, fees and terms can vary substantially from lender to lender.
Thats why its important to shop around carefully and ask questions, Woroch says.
For many borrowers, applying for a mortgage is overwhelming. If youre not sure exactly what to look for, you might want help. A mortgage broker can help you navigate all the different loan options available to you and possibly help you get more favorable terms than youd be able to secure by applying on your own.
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Faq On Mortgage Bank Statements
Why do mortgage lenders need bank statements?
Mortgage lenders need bank statements to make sure you can afford the down payment and closing costs, as well as your monthly mortgage payment. Lenders use all types of documents to verify the amount you have saved and the source of that money. This includes pay stubs, gift letters, tax returns, and bank statements. Loan officers want to see that its really your cash or at least, cash from an acceptable source and not a discreet loan or gift that makes your financial situation look better than it really is.
How many bank statements do I need for a mortgage?
Mortgage lenders typically want to see the past two months worth of bank statements.
Do I have to disclose all bank accounts to a mortgage lender?
If a bank account has funds in it that youll use to help you qualify for a mortgage, then you have to disclose it to your mortgage lender. That includes any account with savings or regular cash flow which will help you cover your monthly mortgage payments.
What do underwriters look for on bank statements?
When underwriters look at your bank statements, they want to see that you have enough money to cover your down payment and closing costs. Some types of loans require a few months worth of mortgage payments leftover in the account for emergency cash reserves. In other words, the upfront costs cant drain your account.
What are sourced and seasoned funds?Do mortgage lenders look at savings?
If You Dont Have Enough Cash For Your Reserve
If you dont think you have enough liquid savings to meet the reserve requirements, dont panic. First, you may not need as much as you think, especially if you have strong credit and have a low loan-to-value ratio. If you qualify for a VA or USDA loan, you may not need any cash reserves at all.
Otherwise, youll either need to increase your savings or beef up your other qualifications to qualify for a lower reserve.
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Rent Out Your Spare Room Or Parking Space
Do you have an extra bedroom in your apartment? If you do, consider listing it on an online hospitality website like Airbnb. With Airbnb, you get to control who uses your space and when.
You can approve dates and guests ahead of time and only rent out your spare room when its convenient. You can even block out dates when your rental isnt available if you have a friend or family member coming for a visit.
If you live in an urban area where parking is at a premium, consider renting out any of your assigned parking with an app like JustPark. JustPark lets you rent out your parking space just like youd rent out your spare room on Airbnb. If you live in a heavily populated area, this can be an amazing source of extra cash on the weekends.
How Do Lenders Verify Bank Statements
Different lenders will have their own processes to get ahold of your documents and verify your income and assets. Some lenders still work with physical, paper documents, while others may allow you to manage them electronically. Once you give them your bank statements, they may follow up with your bank to verify their validity.
With Rocket Mortgage®, you can automatically import income and asset information when you create your account. We integrate with your bank digitally, so theres no paperwork, saving you time.