Larger down payment crucial in today's low-inventory, multiple-offer housing market

by Broderick Perkins

(4/24/2013) - You can't buy a home without a job and, even if you have a job, it's tough to compete in today's market without sufficient income to compile enough money down to match the competition.

In many instances, you'll have to come to market with satchels of cash large enough to beat back or at least measure up to investors' stashes.

All-cash sales were 32 percent of all existing home sales in February, up from 28 percent in January, according to the National Association of Realtors.

The percentage could rise as investors continue to grab up what's left of the spoils.

Investors are well aware the housing market is on the road to recovery and are putting all their chips on the table. They accounted for 22 percent of all homes purchased in February, up from 19 percent in January.

Competition for cash is even tougher in the purely investment and vacation home markets. All cash purchases comprised half of investment purchases and 46 percent of vacation home purchases in 2012.

Time isn't on your side

Time is working against many buyers who want to play the all-cash game.

First, even if you could quickly amass the price of a home in an instant, lenders will still see you as a relative risky proposition.

Lenders want to see "seasoned" money used to buy a home. Seasoned money is what you extract from savings, investments, assets and other wealth acquired over time, not money donated from a crowd-funding source.

After your buy with all cash or a large down payment, new regulations mandate that the lender document that you are still solvent and can pay even a small mortgage payment along with property taxes, insurance, home upkeep, repairs, maintenance and other costs that come with homeownership.

Your approach to savings for and all cash or big down payment deal has to be a more holistic, goal-oriented strategy developed as a frugal, planning-ahead approach to homeownership.

If you take a homeownership counseling class, you'll learn no matter how big or how small your down payment, buying a home is a lot like planning for retirement, sending the kids off to college, launching a new business or striving for any financial goal.

At this point, you do face a conundrum. In the time it takes to properly lay out and implement a well-planned big- or all-cash home buy, investors will be fewer and you may not need as much. However, rising home prices could have kept you behind the eight ball.

That doesn't mean you shouldn't plan now and buy later. It means the sooner you begin to compete the better. You simply could still be years away from homeownership.

Ways to save more money, faster

• Create a budget. A budget tracks your income and your expenditures. It lets you see money coming in and money going out and where you can curb expenditures. Those cutbacks can become savings.

• Save as much as possible as often as possible. When you find expenditures you can cut back, have that amount automatically deducted from your paycheck and deposited in an interest bearing account.

At first the rate could be miniscule. As you save more you'll be able to diversify into investments for a better return on your money. It took you a while to get started saving. It's going to take some time for those savings to pay off. Be patient and keep that long-term goal of homeownership in your sighs.

• Cut back on expensive habits. Some bills and debt payments are fixed. Others are not and can be reduced or eliminated. You can save on groceries, clothing, gifts, gasoline and utilities.

Do you really need a latte every morning. Do you have to eat out for lunch every day? Rent a DVD instead of going to the movies every Friday night. (Pop your own corn and smuggle it in. You are trying to buy a home not finance the movie complex.)

At the supermarket, go generic. Consumer Reports says many generics are as good as or better than name brands and much cheaper.

Do you really need 10 gigabytes of data on your smart phone? Handle more of those smartphone tasks on your home computer. Likewise use technology to read magazines and get other information and dump those in print subscriptions to magazines, reduce cable television use and cut back on other services you can buy for less.

You get the idea. Reducing or eliminating spendthrift habits alone can save you thousands of dollars over the course of year.

• Eliminate credit. Credit often causes you to spend more than you have and with the high credit card interest rates, pay more than is necessary. Keep credit on hand for real emergencies. Not only will reducing credit debt save you money, it'll help boost your credit score. What it's time to buy, you'll get a lower interest rate with a higher credit score.

• Stop loaning Uncle Sam your money. A tax rebate feels good, but for the tax year it's government held, no-interest money you could have invested. Adjust your W-4 to match your true tax liability. Save the difference. If you get a refund from your 2012 taxes, save it.

• Liquidate valuable hobby-like assets. Goal setting and financial planning included setting priorities. What's more important on your road to homeownership, a valuable collection or liquidating that collection to gain a return on a more viable savings investment?

Stamps, coins, baseball cards, comic books, Beanie Babies, Barbie dolls and other collections that are collecting dust in your attic or safety deposit box are all grist for the savings mill.

• Empty the garage, attic, closets. Use E-bay, Craigslist, and garage sales to sell stuff you'll never use. Other than family heirlooms, if something has been stored unused for six months or more there's a good chance you'll never use it. Lose it for money. You'll need to clear the clutter to have less to move into your new home anyway.

• Get another job. Second jobs aren't just for those down on their income luck. Flipping burgers, working a cash register, starting a home-based business on the side, or otherwise finding additional sources of income is also for smart consumers who want to save enough money to help them compete in today's home buying market.