A. The Emergency Fund

Having a properly funded Emergency Fund before saving up a down payment or closing costs is pentacle. Without an emergency fund a person can still buy a home or piece of land. Furthermore the person can still get approved for their loan without said, emergency fund… Are you scared yet? you should be…

A lender will not decline someone when they have their down payment and closing costs handy, even when they person has nothing more. Meaning you dear sir/madam, can buy a home, be approved, close, and get the keys, and the lender will not care that you WIPED YOUR ACCOUNTS OUT. Terrifying, but true. Ergo, this tip is not a regulation, or even a common rule of thumb, at least not yet. No, it’s my advice and opinion after watching homebuyers screw themselves up by not having a safety net before taking the plunge.

BASIC EMERGENCY FUND = 1 Month’s worth of Cost of Living

DECENT EMERGENCY FUND (for those with stable incomes) = 3 Month’s worth of Cost of Living

ADVANCED EMERGENCY FUND (for those with volatile incomes) = 6 Month’s worth of Cost of Living

FULLY FUNDED EMERGENCY FUND (if you’re debt free and looking to pad it) = 9-12 Month’s worth of Cost of Living

“Not having an emergency fund when buying a house is like asking life to not only hand you a lemon… but to chuck the lemon right at your face.“

B. The Down Payment

Keep in mind, this is A+B+C… How much is the right amount to save up for down payment on top of your emergency fund? Go for 10%, or for 5% but whatever you do, don’t limit yourself to nothing…

Typically, I’d recommend at least aiming for 5% down in savings, for multiple reasons. Primarily because if someone has at least 5% saved up, then they qualify for a number of loan types, not just 1 or 2. If someone has 5% to put down they can shoot for Conventional, First Time Buyer (ex. Fannie Mae’s HomeReady), an ARM (Adjustable Rate Mortgage), FHA, USDA’s Rural Development, and even VA. But if that person saves nothing… well then the are limited to No-Money Down Loans.

“Lenders will ALWAYS compensate for risk, but rarely/never out of their own wallets.”

If there’s one unspoken principle to lending that will be forever true, it’s that Lender’s will always compensate for the risk they take in lending out money. The key thing to understand after, is that they will almost never do so out of their own pocket, but instead, out of the pocket of the Borrower. Ergo,
“less money down”, “Low Money Down”, and especially “No-Money Down” will always come at a price. After all, don’t we all know an old person that will tell us that “Nothing in life comes Free” or “There ain’t no such thing as easy/free money”?

That’s right, because on loan types in which a borrower puts very little to no skin in the game, a lender will often mandate *Foreclosure Insurance*. Do they actually call it that? No, of course not. That would hurt feelings and certainly wouldn’t market well in a commercial or on a flyer. So they make cutesy nicknames for it like, “Funding Fee” or “Guarantee Fee” or “Mortgage Insurance” or.. P.M.I. <– See what I mean? As I said in a previous article, PMI is a type of insurance nearly all loans will require when the borrower applies less than 20% toward down payment (or has less than 20% equity in the case of Refinances). But some of these loans out there don’t just charge it in the monthly payment, but will roll in a big upfront charge as well.

“One thing is for certain, you’ll either spend more in the moment, and therefore, less over time…… or you’ll spend little to nothing in the moment, but spend WAY more over time.”

More Now = Less Later

Less or Nothing Now = A Ton More Over Time

I say this with simple math in mind.. more borrowed equals not only more interest accrued, but also more insurance and other costs over time. It multiplies. Sometimes, in an effort to avoid saving up $5k more, a person costs themselves $25k more over time.

Besides, don’t you want to know that when you buy a home you had multiple options at your disposal to choose from? Not just 1 or 2 “desperation loans” aka “Last Resort Loans”.

C. The Lagniappe (The Extra)

In addition to having the proper Emergency Fund and the right mindset for a Down Payment, you should try and save up some extra. How much extra to be exact? Well it’ll differ from house to house, state to state, lender to lender, title company to title company, etc. But if you’re a First Time Buyer you’re probably (or at least, should-be) shopping in a lower price range and should let $5k, $6k, or $7 be your aim. If the house you are interested in is say in a Flood Zone, then maybe beef this up another $2k to be safe.

The purpose for this “Extra” is so that you can pay your own ‘closing costs’ yourself without relying on any DPA (Down-Payment Assistance) or CCA (Closing-Cost Assistance) Programs as well as not limiting your home purchase offer to having to ask a Seller to Pay your closing costs. DPA / CCA programs very often come with very costly and problematic ‘catches’ that you should absolutely be cautious about. (sometimes a 2+ point increase to your interest rate, and sometimes with find print preventing you from refinancing or selling the home within a certain number of years.)

At the time of writing this article the year is 2022. Well a year ago in 2021 homebuyers were facing a housing shortage and a Seller’s Market (meaning there were WAY more sellers than buyers; thus giving Sellers the upper hand because they had so many ppl trying to buy). Buyers were calling my phone completely exhausted an not only emotionally and psychologically worn out, but also physically worn out. Worn out from going to open house after open house, submitting offer after offer, even after being pre-qualified… only to keep having their offers rejected.

Herein I noticed a trend. The buyers that stayed in the market the longest / or flat out indefinitely, were the ones that haggled too hard and kept BEGGING sellers to pay their closing costs. Meaning the Buyer, in a effort to keep from having to come to the table with too much kept submitting offers (full priced or not) with a special condition like “We’ll buy the house at the price you are asking… IF, you agree to pay up to $____ towards our closing costs”. Well, in such a strong Seller’s-Market, the seller has the upper hand so the offers were being declined. Why? Because in this market sellers were getting offer after offer, sometimes dozens at a time. They are logically going to go with the one that nets them the most profit.

“Don’t be the buyer that has a hand to sign for the car loan, but doesn’t have money for gas to pay for the fuel.”

SUMMARY:

The ABC Rule is more of a guideline, and it’s certainly not concrete. Each person will have to try and fit it to their own situation. But I have found that buyer’s that at least let this become their AIM end up landing somewhere close and feel SOOOOO much more confident and comfortable financially when buying their first home.

Until next time, your friendly neighborhood banker,

@joshromine

DISCLAIMER: ** I’m not giving RULES & REGS in this articles, but simply advice I’ve been giving after years working in the industry. Not all loan types that I mention are terrible, but I am simply advising you to be cautious… after all, it’s your money, and your hard earned savings at hand. **