How Far Down Can My Savings Go for a Down Payment?

A couple weeks ago in the post, “Would I, Could I, in a House?” we talked about the proverbial housing market stars aligning: Low Down Payments on FHA loans, Low Mortgage Interest Rates, and Low Housing Prices. On account of which I’ve been more purchase-minded.

Inundated with “Information”

Being a first-time buyer (or, house-hunter I should say), I’ve sniffed out informative articles, mortgage calculators and online tools like Quizzle to check my credit. What am I looking for? Approval mostly. I want all systems to say ‘go’.

Most information has been helpful, but a little vague. ‘Talk to a Mortgage Banker’ or ‘Consult your real estate agent.’ ‘Make sure you have good credit’ or ‘get a pre-approval letter before you shop.’ But last week I came across an article posted on CNN.com about a segment that Suze Orman did on Oprah. She evaluated the financial situation of a variety of guests then told them whether or not they could move forward with their plans: Buy a home, quit work and be a full-time mom, buy a car, etc. And I found the suggestion on buying your first home extremely helpful (and specific).

SIDEBAR: We’ve been saving a lump sum of cash in a low interest bearing savings account to use as a down payment on our first house. However, our own personal savings account is well… it isn’t much. Let’s just say it’s enough to serve as a form of overdraft protection.

Back to Suze. Here’s why her segment was helpful: Turns out the Oprah guest who wanted to buy a home was going to use the money in her savings account (like us) for her down payment. She had $8,500 in her savings, and she needed a $5,000 down payment on a $150,000 house. I’m thinking: Great. She’s totally in. She can throw down 5K and still have a little cushion left over to rebuild her savings on.

Emergency? What emergency?

But get this… That’s where I was wrong. According to the finance gods, you can’t use your ‘emergency savings fund’ for a down payment on a home. Can’t do it! And I thought, maybe that’s why my mind has been in the wrong place. I haven’t been thinking of our savings account as an ‘emergency’ fund at all. When in fact, this is the only money we have to pay our bills if one of us were to lose our respective jobs.

The Girl’s Got a Point

The article suggests that the general rule for buying a house is that your savings account (ehem, “EMERGENCY fund”) should carry at least 8 months of expenses  in it in order to be in a financially sound and stable situation. Untouched. Then your down payment money should be in addition to that so that your emergency fund can land on the other side of this big purchase unscathed.

I have to say, I thought this was actually very good advice (enough to share it obviously).

So while it was a little discouraging that we haven’t reached the level of financial stability that we ought to in order to purchase our first home, it feels good to have a goal. It feels good to have specific numbers that we should aim for so that when we do make our first purchase, we can be 110% confident that we’ve made a good financial decision.

One step closer to ‘go’.

Photo Credit: annia316

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