Seven Tips to Help You Save For a House Down Payment
- When preparing to buy a home, it’s essential to understand what’s needed to purchase a home comfortably.
- A down payment is a sum of money, generally a percentage of the purchase price that you pay out of your pocket to fund the home.
- Make a plan to save the money necessary for the down payment and other essential costs.
With home prices at record highs and interest rates creeping back up, now is a difficult time to buy a home. As a result, understanding the fundamentals of preparing to buy a home is more important than ever.
One of the most important ways to prepare to buy a home is to save for a down payment. Saving for a down payment is simple, but that doesn’t make it easy. So if you are preparing to buy a home and trying to figure out how to save for the down payment, here are seven tips to that can help you on your journey.
7 Steps to Save for a Home Down Payment
1. Calculate The Costs
If you're planning to purchase a home, it's best to start saving now. How do you start? Call a mortgage broker to guide you through the home-buying process.
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, you can take your time fixing the issue and use that time to save for a down payment.
If you get pre-approved, you now have a starting point to save for a down payment. Saving for a down payment starts with your loan product. Ask your mortgage broker which loan product is best for you to use that will provide you with the most benefits.
Depending on your loan, the amount you need to save varies dramatically. Some options may include the following:
- VA loan with a 0% down payment
- FHA loan with 3.5% down
- Conventional loans have anywhere from 3% to 20% down payment requirements.
Let’s say you’re using a conventional 20% down payment loan on a $250,000 house. That means you must 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 include paying the title company, lender fees, insurance, taxes, 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.
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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 increase the gap is to reduce expenses. It is hard to say what you need to cut out specifically, but there are two things to keep in mind.
#1: The Big Three: Housing, Transportation, and Food.
First, the biggest things everybody spends their money on are housing, transportation, and food. Any way you can cut back on those will make the most considerable difference in your budget.
#2: Track Spending
Second, you don’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 where you are spending the most of your money and find solutions to cut back and reduce your expenses.
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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 to help increase your hard and soft skill sets can be viable options. When you increase your income, you can plan to put the extra money into your down payment savings fund.
4. Pay Off Debt
Debt is an expense people often don’t think about. However, 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 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, which is a win-win situation.
Recommended Read: Why Your Credit Score Matters When Purchasing a Home
5. Down Payment Assistance Programs
If you don’t see any way to save enough to buy a home, look into down payment assistance programs. Several very generous programs out there pay large chunks of your down payment. Some even pay the entire down payment for first-time home buyers. This is another reason to call your mortgage broker because they will share these options for downpayment assistance programs or first-time home buyer programs to help save you money.
6. Creating a Savings Plan
Having a money goal is great, but it is less likely to work when you don’t have a plan. A savings plan is a way to track your progress toward 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 need to save about $1,736 a month to meet your goal.
By tracking your progress, you’ll know how you’re doing and will be motivated to keep going as you get closer to your goal.
7. Keep Your Down Payment Safe
Spending your down payment can be very tempting when you see all that money stacking up in your bank account. But, when you decide to purchase your home, an FDIC-insured bank is the only place where your money is guaranteed.
Think Twice Before Investing Your Savings
Putting your down payment savings into the stock market, buying cryptocurrency, or betting at the casino are possible ways to lose your down payment. Remember, you’re saving up for your home and don’t want to risk losing your money.
Recommended Read: Six Tips to Maximize a High-Yield Savings Account
The Money Wrap-Up
Buying a home is a goal many people can reach with discipline and commitment. By following the seven steps mentioned above, anyone can save for a down payment.