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How to Save Money When Buying a Home

The average American family spends $12,000 to $25,000 on a down payment for the purchase of their first home.  That's not chump change. And now with real estate prices skyrocketing, it's easy to read about friends and family who bought fabulous homes years ago and are now sitting on all sorts of equity.

And this is why people often ask, "How can I buy a home for less?"  First of all, there's technically no such thing as buying a home for less.  Homes sell for what they sell and there's little anyone can do about that.  But while you can't control the market prices on homes, you can control how much cash you need to bring to the table.

So yes, there are strategies that you can use to buy a home for less than the average down payment costs, and this article outlines five of them.

Not buying all at once

The two biggest reasons why people spend more than they should on their down payment are 1) they stop making their regular monthly house payments for a time to save up, and 2) they use credit cards (or overdraft protection).  Neither of these is the best way to go.

The first reason—stopping your house payments—is not only costly, but it also wrecks your credit score.  Your loan payments are reported to the credit reporting agencies, so if you stop paying your bills, they will appear on your credit report and they will hurt your credit score. And this brings us to reason number two—using credit cards or using overdraft protection with your checking account to save up for a down payment.  You have to have a good credit score to buy a home, so it's time wasted if you're building up your credit ratings at the same time.  If you're interested in buying a house right now, you need to start making your regular monthly payments again—even if it means getting another job or borrowing money from family/friends.

If you can't bring all the cash to the closing table, you could face difficulties obtaining a mortgage.

Buying in your "sweet spot"

The average down payment for first-time homebuyers is $12,000 to $25,000, but let's say right now you have $700 in your checking account.  That means you need to come up with a down payment of approximately $13,000 to get a standard conventional loan on a house.

And what happens if the home you want is listed at $150,000?   You can't buy that house unless someone gives you the difference between $150,000 and $13,000!

Here's the simple strategy: buy a home in your "sweet spot," which is typically somewhere between one-fourth and half of your monthly income.  For example, let's say you make $3,333 a month after taxes.  You should try to find a house that costs no more than about $1,000 a month in mortgage payments. You would need to spend half your monthly income or less on the down payment for this house.

Buying with a family member

One way to buy a house is to ask your parents, siblings, or relatives if they will help you out.  And this isn't as crazy as it sounds, either.  According to the National Association of Realtors, about one-third of first-time homebuyers have some form of family assistance with their purchase.

The benefit here is that offerings from your relatives tend to be lower than what you might find on the open market.  Also, they are usually willing to work with you on the financing.  And if your credit score is too low to qualify for a conventional mortgage, maybe they are willing to co-sign for you.

Having 100% financing

Sometimes, sellers are willing to finance part of your down payment for you through private mortgage insurance (PMI).  This often happens when the purchase price of a home is less than 20 percent of the market value.

Keep in mind that PMI on a $60,000 condo is going to be considerably cheaper than PMI on a $1 million house.  Also, if you can find a bank or credit union willing to finance part of your down payment instead of charging PMI, you will probably save even more money.

Another option is using a no-down-payment loan called an FHA loan. An FHA loan requires only 3.5 percent down and includes mortgage insurance (although not as much as their conventional counterparts).  Keep in mind that getting an FHA loan does mean you'll have a slightly higher interest rate and closing costs.

Compare all options

Working with a local realtor and mortgage broker can be the best way to not only explore your fnancng options, but help you find good property deals in your area. With these two resources, you should be able to hopefully buy a home for less. Good luck!