Save for Settlement Costs
TLDR: Make sure you have enough liquid assets to cover a down payment AND closing costs. This can be done through long-term planning and/or research into current opportunities.
After you've decided how much you're going to put down on a house, you'll need to start saving up. The lender will want to see that you have enough cash reserves to pay the down payment before they approve you, so you'll typically need to prepare your finances in advance. (By the way, it doesn't have to be cold, hard cash. It can come from your checking, savings, or investment account.)
Other ways to come up with the down payment include gifts from relatives or seeking out financial assistance from government entities. Local governments will often provide grants to community servants, including teachers, firefighters, and police officers, so make sure to look into available programs if you're employed by your county or city.
Make sure you've estimated the costs to close (in addition to down payment) to the best of your ability; you don't want a deal to fall through because you didn't accurately estimate the amount you'll need to close.
Are there any ways to save up faster?
Unless you have the ability to increase your income with a snap of your fingers, you may need to get creative if you're looking to expedite the time it takes you to save up for a house. Aside from digging for loose change in your couch cushions, here are a few ideas for finding money to close (or reducing the cost to close):
Ask for closing assistance from the seller (note: this can't go toward the down payment, but it can go toward closing costs)
Look up federal, state, and local loan and grant/down payment assistance programs. These can be in the form of loans or gifts that you don't have to repay
Borrow from your retirement or 401k account
Find out if your employer offers incentives to use affiliated lenders (although we've found that these lenders don’t typically offer rates that are as competitive as you'd hope)
Ask family members for an early birthday/graduation/Christmas present
Storytime
"A friend and police officer was able to get a local community servant grant when buying his $300,000 townhouse. Coupled with a 2.5% seller subsidy that was negotiated, he only needed to come up with $8,000 out of pocket for his house!"
Should I sell stock, bonds, etc. before applying for a loan?
Banks will generally accept brokerage statements as proof of having funds, so this is up to you. This is the bank's way of verifying that you do, in fact, have enough money to close. If you’re fearful that market fluctuations may result in you not having enough funds to pay the required amount at closing, feel free to sell your assets in advance, but know that it could be some time between when you sell and when you need cash to close on a property.
If I'm planning on selling another property and using those proceeds as the down payment, when should I start that process?
The likelihood of your offer being accepted is highest if you're already under contract on your current property. If you've found a house that you’d like to purchase but aren’t under contract on your current property, include contract language to protect yourself.
A Sale of Other Property Contingency in your offer will ensure your earnest money deposit is returned to you if you’re unable to close on your existing property.
Provide yourself with ample time to close on your current property. While the normal closing time frame is 30-45 days, giving yourself a 60 or 90 day window provides flexibility in the event that issues arise.
Step 1 Tasks
Prepare to Pay for the Property
Calculate What You Can Afford (optional)
Estimate Your Down Payment (optional)
Estimate Your Cost to Close (optional)
Save for Settlement Costs (optional)
Look Up Loan Assistance (optional)
Improve Your Credit Score (optional)
Make a List of Desired Features (optional)