Saving for a down payment for a home can seem overwhelming, but these tips and suggestions can help remove some of the pressure!
Calculate how much you’ll need
The first couple of things you need to calculate are how much house can you afford and what type of mortgage loan you will be getting. 20% has traditionally been the normal down payment, but there are other options available, especially if you are a first-time home buyer. Depending on your situation, your down payment could be as low as 3.5% or even 0%.
Once you’ve decided on the type of loan you’ll be using and the price of the house you’d like to buy, it’s time to make a plan and start saving for a down payment. When calculating the total amount you’ll need to save, don’t forget to factor in closing costs. These typically run 3%-6% of the home purchase price. For example: You’ve been approved for an FHA with a 3.5% and are looking for a house around $250,000. You’ll want to save about $8,750 for a down payment and an additional $7,500 to $15,000 for closing costs. The amount can sound daunting, especially when you’re just starting your savings goal. But with a number in mind, it can help you keep your eye on the prize and protect against surprise costs.
Make a savings plan and budget
Ideally, you should already be saving about 20% of your income. A person with an income of $80,000 a year should aim to save about $16,000 a year ($1,334 a month). Take a look at your current income, debts, and spending habits to see if 20% or more is feasible. If not, start smaller. While saving 5% of your income may make saving for your future home a longer process, it’s still a start.
Once you begin saving, consider not only a savings account, but also putting your money into a high yield account. This could be something like a CD (certificate of deposit). These accounts typically have higher interest rates and can help prevent accidental spending since they are separate from other accounts.
Think about increasing your income
After setting up your savings goal, you may realize that that goal doesn’t align with your current income. In some situations, it may be time to look for another job entirely, or you may want to consider other ways to supplement your income. A short-term side hustle such as delivery driving, car sharing, or baby-sitting may fit in with your current schedule and add an extra boost to your bucks. Other options might include a garage sale, picking up extra shifts, turning a hobby into a source of income, listing a room as an Airbnb, or negotiating a raise at your current job. If none of these are options, you may want to reconsider your budget or your timeline for buying.
Examine your spending
Another way to increase the amount of money available to save is to take a good look at your spending habits. Even a few dollars spent per week can add up to quite a bit in the long run. Eliminating just $15 a week in spending can equal over 700 extra dollars in your account every year. A few ways to lower your spending might be:
- Trade in a gas-guzzler for a smaller car with better gas mileage,
- Cut back on fast food or dining out,
- Move to a more affordable rental or get a roommate,
- Limit entertain purchases, such as streaming services
- Shorten a vacation by a few days, visit a different locale (i.e. travel to a city or town nearby rather than fly overseas), or put it off until after you’ve bought your house.
Pay off debt
While it may seem counterintuitive to use a large chunk of money to pay past debts, there are several significant benefits. High interest rates can cause your debts to be significantly higher in the long run. Paying them off sooner rather than later can lower the total amount. This will also allow you to free up more of your income to save, as well as potentially raising your credit score. A higher credit score can mean lower interest rates for your home loan.
Look into first-time home buyer programs
If this is your first home purchase, there are a variety of programs available to you. Some of the options can help you lower your down payment significantly and/or offer down payment assistance. Check out this post to see if any of these programs may work for you.