How to save for a down payment

• Know how much you need to save in advance.
• Increase the gap between income and expenses.
• Make a plan to save.

With home prices at record highs, as well as interest rates creeping back up, now is a difficult time to buy a home. It is more important than ever not to neglect the good fundamentals of preparing to buy a home.

One of the most important ways that you can prepare to buy a home is to save for a down payment. Saving for a down payment is a simple process, but that doesn’t make it easy. So if you are preparing to buy a home, and are trying to figure out how you can save for the down payment, here are 7 steps for how to save for a down payment.

7 Steps How to Save for a Down Payment

1 Calculate how much you’ll need

Buying a home should not be a last-minute decision. It can take years to be prepared to buy a home, so if you are planning to purchase, even if it isn’t for a while, it is best to start now. So how do you start? Call a mortgage broker.

When you call a mortgage broker you can get pre-approved for a certain amount, or they’ll tell you why you don’t currently qualify. This is vital information. If you don’t qualify for whatever reason, fix it and use that time to start saving for a down payment.

If you get pre-approved, now you have a starting point to save for a down payment.

Saving for a down payment starts with your loan product. Are you using a VA loan that has a 0% down payment? Or an FHA loan with 3.5% down? Conventional loans have anywhere from 3% to 20% down payment requirements. Depending on your loan, the amount you need to save varies dramatically.

Let’s say that you’re using a conventional 20% down payment loan on a $250,000 house. That means you need to bring $50,000 to the table to close, right? Sadly no, you’ll need a bit more than that. Too many people forget closing costs when calculating their down payment.

Closing Costs

Closing costs include paying the title company, lender fees, insurance and taxes upfront, and other fees. Usually, the closing costs are between 2% and 5% of the purchase price. So for the $250,000 house, you could need as much as $12,500 in closing costs, which means you’d need to bring $62,500 to closing.

Always save for a down payment assuming you'll pay the larger amount in closing costs. You can always spend less on your down payment and closing costs, but not having the money to pay closing costs can cost you the house.

2 Reduce expenses

Now that you know how much you need for your down payment (including closing costs), it is time to start saving. Savings are the gap between your income, how much you make, and your expenses, how much you spend. Many people live with a gap that is near 0, and some are even consistently spending more money than they bring in every month.

To save for a down payment, you need to grow that gap. One of the simplest ways to grow the gap is to reduce your expenses. Just stop spending your money on so much stuff. It is hard to say what you need to cut specifically, but there are two things to keep in mind.

First, the biggest things everybody spends their money on are housing, transportation, and food. So any way you can cut back on those will make the biggest dent. And second, you can’t really know what you’re spending all of your money on unless you track your spending. By writing down where your money is going, you can see what you’re spending on that you don’t care about and cut back there to reduce your expenses.

3 Increase your income

Like reducing expenses, increasing your income is another way to widen the gap between income and expenses. If you have a shorter timeframe for your down payment, then simple side jobs or side hustles can work wonders for increasing your income.

If you have a longer timeframe, working for a promotion, changing jobs, or getting more education can be viable options. Just look for ways to make additional money and put all of that into your down payment savings fund.

4 Pay off debt

Debt is an expense people often don’t think about. By paying the minimum debt payments, the amount that you pay in interest increases dramatically. If you pay off your debt at the beginning of your down payment savings journey, you could then turn around and roll all of those minimum payments into your down payment savings instead.

Paying off debt will also help you qualify for a mortgage, so it is a win-win.

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5 Qualify for down payment assistance

If you don’t see any way that you could save enough to buy a home, look into down payment assistance programs. There are several very generous programs out there that pay large chunks of your down payment. Some even pay the entire down payment for first-time home buyers.

6 Creating a saving plan

Having the goal to save it is great, but it is less likely to work when you don’t have a plan to go with it. A savings plan is a way to track your progress towards a goal. To create a savings plan, you’ll need to know how much you want to save and when you want it saved.

Let’s go back to our $62,500 down payment example. It will take most people quite a while to save that much money, so let’s say you want to buy a home in the next three years. Three years is 36 months, so you would need to save about $1,736 a month to meet your goal. By tracking your progress you’ll know how you’re doing and have the motivation to keep going as you get closer to your goal.

7 Keep your down payment safe

It can be very tempting to do something, anything, with all that money lying in the bank while you’re saving up for a down payment. But conventional wisdom says just leave it there. An FDIC-insured bank is the only place where your money is guaranteed to be there for you when you go to purchase your home.

Putting your down payment savings into the stock market, buying cryptocurrency, or betting on black are likely ways to lose your down payment before you need it. Remember, you’re saving up from your home, you don’t want to risk that.

Anyone can save for a down payment by following these steps.

When do you plan to buy a home? Comment below.

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