If you are a prospective home buyer, you know that one of the most difficult parts of pursuing homeownership is saving up for a down payment, but it’s absolutely possible.
Let’s explore how to save for a down payment.
What Is A Good Down Payment For A House?
Most mortgage lenders would love if borrowers put down 20% for a home as it lowers their risk when funding the loan. However, in today’s market, you won’t be required to pay that much. But you’ll probably have to pay for private mortgage insurance (PMI) instead, which is an extra cost on top of your monthly payment.
First-time home buyers can access several mortgage options that allow for a more manageable down payment. Depending on your situation, you may qualify for one of three low down payment options:
- A fixed-rate conventional loan: You can obtain these loans with as little as 3% down.
- An FHA loan: You can obtain these loans with as little as 3.5% down.
- A VA loan: You can obtain these loans with as little as 0% down.
As you can see, there are plenty of ways to avoid the large 20% down payment. That could shave thousands of dollars off your expected down payment – and months off of your savings strategy.
Consider exploring our mortgage calculator if you aren’t sure how much you’ll need to put down on your new home.
How To Save For A House Down Payment
As you start to consider how to save for a down payment on a house, there is one undeniable fact – saving up a substantial amount of cash is hard. The process of saving for any major expense can be a challenge. But the good news is that you can steadily build your down payment fund by taking action on the steps below.
Depending on where you are starting from, you may be able to achieve homeownership within a year. Are you ready to get started? Here are the top steps you should take when saving for a house down payment.
1. Plan Your Savings Budget
As with all major financial goals, you’ll need a plan to start building up your down payment.
The first component of the plan is to determine how much you’ll actually need to save. You can strategize by looking at the homes in your target area for homeownership. Consider the prices and decide what would be the right budget for your homeownership dreams and your finances.
Once you have an idea of how much you plan to spend on your home purchase, consider your loan options to see what size down payment you’ll need. If you are considering a fixed-rate conventional loan, you may be able to put down as little as 3%. That would lead to a down payment of $6,000 on a $200,000 house.
But don’t forget to factor in closing costs, which can be another significant expense – typically, closing costs run between 3% – 6% of the home purchase price. So, keep that in mind when deciding on your savings goal.
With a number in mind, it’s time to set aside money in your budget for this goal each and every month.
Instead of leaving the funds sitting in your checking account, consider transferring these specific savings into a high yield savings account. The separate account should prevent any accidental spending. Plus, the high yield will help push you toward your ultimate goal.
2. Increase Your Income
Even with a budget in place, you might find that there is simply not enough money available to allocate toward your down payment fund. Unfortunately, that’s normal when you are looking at buying a home.
Most prospective home buyers, including myself, had to get creative and boost their income in order to increase their savings. Personally, I took on a side hustle to boost my income. But there are lots of ways to make extra cash, including working overtime, selling unused items, taking on a second job, or negotiating for a raise at your current job.
It might take some brainstorming to find the right source of extra income for you. But the extra effort will be worth it when you make your dream of homeownership a reality.
3. Cut Unnecessary Spending
In addition to increasing your income, cutting out extra spending can give your savings a boost. Although cutting out spending isn’t necessarily fun, it can help you achieve your savings goal. A few places to consider cutting include:
- Decrease spending on take-out and fast food.
- Limit entertainment-related purchases, like movies and video games.
- Forgo the vacation this year.
- Reduce spending on trendy clothing.
- Relocating to a more affordable apartment or neighborhood.
- Get a roommate to save on housing costs.
- Start biking to work to save gas money.
Seek out creative ways to cut back on costs in your own life. Although small cuts may not seem too dramatic, a series of small cutbacks can lead to big savings.
4. Pay Off Your Debt
If you have high interest debts, such as student loans and credit card balances, that could be eating into your ability to pay for a new home. High interest rates can wreak havoc on your finances. With that, it’s a smart move to pay off your high interest debt before saving up for a down payment.
This strategy offers two benefits.
First, you won’t have high interest debt burning through your paycheck. When these expensive debts are wiped from your books, you’ll supercharge your ability to save for a down payment.
But second, paying down your debt offers the opportunity to increase your credit score. Since a credit score is a key component in the home buying process, this can help you obtain better loan terms when you apply for a mortgage.
It’s never a bad idea to pay off debts with high interest rates. But as you prepare for homeownership, the pressure to eliminate these expensive debts is higher than ever.
5. Research First-Time Home Buyer Programs
If you are a first-time home buyer saving for homeownership, then you should take some time to explore the common first-time home buyer programs.
These programs are designed to help you achieve your goal of buying a home by helping out with a down payment or offering a low down payment option. A few to consider include Fannie Mae and Freddie Mac’s down payment assistance programs, VA loans and grants, USDA loans, and FHA loans.
You might be surprised by the amount of help that is available to you. Depending on your personal finance situation, you might be able to cut your required down payment amount by thousands.
The Bottom Line
The process of saving for a down payment will take some time. But with diligent action, the process might not take as long as you might think. As you implement the steps above, you’ll be well on your way to becoming a homeowner sooner rather than later.
Are you ready to discuss your home buying options? Start by talking to a Home Loan Expert today.
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