Experts give advice for saving to buy a house from down payments to mortgages to interest rates
CHICAGO (WLS) -- Owning your own home is part of the American Dream, but financial experts say it's becoming harder to make a reality. Inflation and higher interest rates are making it especially challenging.
This is especially true for younger people who are paying high rent and not able to save enough. But there is help available.
"The inflation really has made it difficult and especially coming up with the down payment," said Julio Roman and Jessica Tristan who have been struggling to buy, but are determined to become homeowners.
The family currently rents near the city's South Shore neighborhood and are excited to buy.
"You figure once we get our own home, it's money that we're investing in our selves essentially and then we can use further down the line if we choose to as opposed to just paying out rent and never seeing anything of that money come back to us," Roman said.
But that financial goal is becoming harder to achieve. Recent studies by Zillow and Bankrate show that salaries aren't keeping up with costs.
"We're talking about home prices that have risen persistently. And we have the highest mortgage interest rate in a generation so those two things combined really make for a very, very challenging environment for prospective homebuyers," said Mark Hamerick, senior economic analyst at Bankrate.
The I-Team looked into the changes in costs throughout the last several generations. Since 1980, the average Cook County home price has increased more than $75,000 when adjusted for inflation. But the average salary in Cook County has only gone up by about $8,500.
Saving for a down payment is also becoming harder with higher rent prices.
In 1980, 60% of renters in Cook County were able to spend less than a third of their income on rent. Fast In 2022, only about 50% of renters are able to spend less than a third of their income on rent, making it harder to eventually buy.
"That breaks my heart to hear you say that, because they can buy a home," said Melissa Conyears-Ervin, Chicago's City Treasurer.
Conyears-Ervin and CIBC Bank recently held a home buying workshop at a branch in the Little Village neighborhood.
"At CIBC, we have our own closing cost assistance program, there are others from different agencies or partners around the city that you can stack that really helps to bring your overall mortgage down because you have all that down payment assistance," said Amy Yuhn, head of Personal and Community Development Banking for CIBC US.
There are also city and state government grant programs which offer down payment assistance.
"That's free money to help you put down your down payment to help you purchase your own home especially first time homebuyers," Conyears-Ervin said.
Special loan programs can also lower the standard 20% down payment. However, if you have a lower down payment, you may need mortgage insurance.
The most popular of those programs is a Federal Housing Administration loan for first time home buyers.
"Especially if we learn to save directly from our paychecks and then we wanna save in a high yield savings account. As low as $25 a paycheck, start saving," said Conyears-Ervin.
Other tips to save for a down payment include investing in a Money Market account, use a cash-back credit card and stash that cash. And don't forget about saving your tax refunds.
Roman and his family said with the help available, they'll be able to move ahead with their home buying dream.
"It's exciting to be able to have the opportunity to have my part of the American dream," he said.
Conyears-Ervin said improving your credit score can also help lower the interest rate you may qualify for so make sure you are paying off debt regularly, and not missing any credit card payments.
How do you save money to afford a house?
Saving for a down payment may be more about keeping the cash out of sight and out of mind. Each savings option can easily be set up for automated transfers from your checking account.
- Automate savings. Set up automatic transfers from your checking to your savings account. Deposit some of your paycheck directly into your savings account.
- Save extra money. Whether you get a raise or bonus, or if we're simply talking about your tax refund, add the money to your down payment savings rather than spending it.
- Stash spare change. No, not in a piggy bank. A variety of banks and savings apps allow users to round up card purchases to the nearest dollar and put the change in a linked savings account.
- Use a cash-back credit card. You guessed it - put that cash back toward your down payment fund. To maximize your cash back, put as many purchases as possible on your cash-back credit card, making sure to pay it off each month so that interest charges don't decimate your earnings.
Keep down payment savings in the right account
- High-yield savings accounts. With easy access, total liquidity and FDIC insurance, these accounts are a solid choice for short- to mid-term savers.
- Money market accounts. A money market account can also be a good option for the short-term saver. It takes a bit of shopping to find decent returns.
- Certificates of deposit. Once you have a good-sized chunk of savings, you could open a certificate of deposit timed to mature around the time you expect to have the bulk of your down payment saved. CDs offer a slightly higher rate than savings accounts or money markets.
Improve your credit score.
A good score can determine whether you can get the best mortgage at the best possible interest rate.
- A credit score may feel even more important to homebuying plans right now since mortgage rates are a key factor in affordability.
- A credit score isn't the only deciding factor on your mortgage application, but it's a significant one. So, when you're house shopping, it's important to know where your credit stands and how to use it to get the best mortgage rate possible.
- A score of 740 or above is considered very good, but you don't need that score or above to buy a home. In fact, scores in the 580s to the mid-600s can help qualify for home loans that make it easier to afford a new home.
How to make a down payment more affordable?
Down payment assistance programs: They can help satisfy the minimum down payment required for a mortgage.
It can come in the form of an interest-free loan or a grant. One might receive forgiveness for a down payment loan, and a grant does not require being repaid.
Depending on the program, the loan might be forgiven after a period of time -typically five years, as long you agree to live in the home until the forgiveness' period ends.
What programs are available for first-time homebuyers to help with the down payment?
The Neighborhood Housing Services of Chicago (NHS) offers the Down Payment Assistance program. It provides a $20,000 grant for Chicago Housing Authority residents and $10,000 for non-CHA residents, living in, or moving to Chicago that meet income limits.
The funds may be used for a down payment, to lower a loan amount or to cover closing costs for a single-family home, townhome, condo, and 2-4-unit buildings, in the city of Chicago.
Illinois Housing Development Authority (IHDA) offers several down payment assistance programs for first-time homebuyers that provide up to $10,000.
IHDA down payment and mortgage programs are available through local participating lenders who can answer questions about program eligibility and help homebuyers figure out what program is best for their unique situation.
The City of Chicago's Department of Housing's: Building Neighborhoods and Affordable Homes Program provides forgivable grants to qualifying buyers to assist in their purchase of owner-occupied residences that are newly constructed single-family residential buildings. It provides up to $100,000 in purchase price assistance to qualifying buyers.
What Loans Make It Easier to Afford a New Home?
FHA Loan
- One of the easiest mortgages to get approved for first-time homebuyers with a low credit score and minimal down payment savings.
- Steady employment history is essential
- 3.5% down payment options for those with credit scores of 580 or above. Lower credit scores require a 10% down payment.
VA Loan
- Issued by private lenders and backed by the US Dept. of Veteran Affairs
- Minimum credit score will vary by lender but most like to see 640 or higher
- Minimum down payment: 0%
- Borrower must be an active or retired service member or spouse
USDA Loan
- Minimum credit score is typically 640 and 0% minimum down payment
- 30-year fixed mortgages for low-to moderated incomes in rural areas and near the city or in a suburb
Freddie Mac Home Possible Loan
- Minimum credit score 660 and a minimum down payment of 3%
- This first-time homebuyer is required to purchase a home in an underserved area or have an income no greater than 80% of the median income for that community
Fannie Mae HomeReady Loan
- Easier to qualify with a lower credit score and only 3% down
- Borrowers can use grants and gifts from nonprofits, churches, or family members to help with the down payment.
- No personal funds are required but private mortgage insurance is required for less than 20% down payment.
Good Neighbor Next Door Loan
- Incentivizes primary and secondary school teachers, first responders (law, enforcement, firefighters, EMTS with a discount on a property's listed price.
- Down payments as low as $100 and a credit score as low as 500 to 580 and live ina HUD approved revitalization area for 36 months.
IHDA Mortgage
- All IHDA down payment assistance programs offer 30-year, fixed-interest loans at affordable rates. They have generous income and purchase price limits. Homebuyers in the Chicago Metro Area may earn up to $132,360 per year and purchase a home or condo for as much as $581,176.
- Homebuyers do not need to have a 20% down payment with an IHDA mortgage. With an IHDA mortgage the buyer's contribution is $1,000 or 1% of the purchase price, whichever is greater. So, for as little as $1,000 out of pocket, you can get into your first home.
And then there is the most common mortgage loan:
Fannie Mae Conventional Loan
- Minimum credit score is 620 and down payment as little as 3%
- One of the most common types of mortgages in the US
- Offers 15-year and 30-year fixed mortgages
- For down payments of less than 20% one will need to purchase private mortgage insurance but that can be canceled once 20% equity is reached.
What you need to know about Closing
Working with a trusted lender and financial institution is the best way to get more information on how your credit score could factor into your home loan and for help finding the mortgage you're able to afford to help buy that new home.
More helpful websites
For a complete list and schedule of all the City Treasurer's Office financial education and literacy programs and a video library -- to help build wealth today for tomorrow -- please visit www.Chicagocitytreasurer.com.
IHDA: www.IHDAmortgage.org; mortgage@ihda.org; 877-456-2656
CHA and First Time Homebuyer Program
