Good Lessons for Home Buyers

Purchasing a home can be a bittersweet experience. On the one hand, the excitement of owning a new house, and on the other, the dreaded reality that you have no money left in your bank account.

Typically, we scrape together as much cash as possible and apply it to the down payment and closing costs. But is this the best strategy? Many lenders would prefer a buyer have a smaller down payment, and a cash reserve for emergencies. Ideally, buyers should try and build up an account that will cover three to six months worth of mortgage payments and living expenses.

In addition to regular expenses, new home buyers on average, spend an additional $4,900 during the first year just making minor repairs and making the house their own. Buyers of resale houses spend about $3,600. These numbers are based on statistics by the National Association of Home Builders.

None of these expenses are taken into account in the requirements by the Federal Housing Administration who only request that a buyer has a minimum 3.5 percent down payment. Although this extra cash buffer is not mandatory, it will prevent many sleepless nights for the home owner.

In order to help out with the down payment or closing costs, the government has introduced an $8,000 tax credit. Qualifying home buyers can borrow the money and then file an amended return, using the $8000 refund against their 2008 taxes, and add to their savings account. The credit applies to those who have not owned a home in the last three years, are buying between January 1, 2009 and November 30, 2009; and does not apply to married couples earning $150,000 or more, or singles earning $75,000 or more. It also doesn't apply to those in the Washington area obtaining loans that exceed the FHA's limit of $729,750.

Some buyers toy with the idea of cashing in their savings to pay off existing loans in order to boost their credit. Paul Corey, a mortgage loan officer with Weichert Financial Services in Montgomery County, warns against this idea.

"Sure, it's good to not have a debt any longer, but if you've totally wiped out your savings, what good are you doing in the long run if an emergency pops up?" he said.

It's good practice to place your savings in a high interest bank account, money market fund, or short-term bank certificates of deposit, where you can access it quickly, and without penalty if the need arises. Lenders will still consider up to 70 percent of the money invested in retirement accounts towards cash reserves.

Once you have built up that reserve account then applying any extra money to your deposit is definitely the way to go. Not only are you saving on interest payments, but the cost of mortgage insurance drops dramatically. For instance, 10 percent down on a $250,000 mortgage results in an insurance payment of $129 per month. Increase that down payment to 15 percent, and the payment reduces to $79. If you can apply 20 percent, there is no requirement for mortgage insurance.

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