One of the biggest achievements that most aspire to accomplish is to purchase your own home. This usually signifies to most that you’ve somehow made it. It is often a very exhilarating experience. The whole experience can be the greatest moment of your life. There is something about no longer having to rent that really gives you a rush. You suddenly are so overwhelmed with many different emotions. You go from being thoroughly excited but completely scared of the new reality. Looking for a home is the fun part. You get to go through the mortgage process with your bank to see how much you will be approved. Depending on what you do for a living, coming up with the down-payment for the house may or may not be an easy thing. The more expensive the house the larger the down payment. Let’s talk about how to make sure you’re ready to start saving for a down payment in the first place.Before you attempt to save a single penny for a down payment, you should be completely debt-free and have a fully -funded emergency fund of 3-6 months of expenses. Read my blog post – How to start and build an emergency fund HERE. Being debt free is an amazing feeling but with home purchase you are about to embark on a totally different journey. Having a mortgage will be a very big financial decision so you must go into it as best prepared as possible.
Saving for a down payment on a house can be overwhelming, but when you have a clear concise plan, it does be easier than you imagine.
- Get a Down Payment Savings Goal– If you can’t pay cash like most of the world, you would have to put at least 10% down on your new home. 20% is even better. That way you can avoid private mortgage insurance (PMI). This is an extra cost that your lender tacks on to your monthly payment just in case you don’t make payments on your loan.Always remember to buy a house that you can actually afford. You may not get everything that you want in your first house in your price range. Some people choose to buy a fixer upper and renovate over time. Some tend to buy in new developments so that they have a choice in the finishes prior to moving in. Others like the charm in buying an older home. Most times the bank may approve you for more than you are actually comfortable with paying back. Look for a house that is within your budget, where paying your mortgage and all other house bills are within reach and feasible. Stick with a 15-year fixed rate mortgage that’s no more than 25% of your monthly take home pay. For most mortgages, you’ll have to put at least some money down, and that’s not the only thing you should save for: There are also closing costs, property taxes, and ongoing repairs and maintenance. That’s a lot to take on, and it makes sense to take a few years to save up before you can buy a home. That may seem like a long time, but don’t worry — there are a few ways to speed it up.While it’s tricky to amass thousands of dollars for a down payment when you’re already stretched to the max with expenses like rent, utilities, student and/or auto loans, transportation and possibly childcare, it is possible.
How much do you really need?You need a 20% down payment to buy a house, right? Not necessarily — many banks now offer conventional mortgage loans with down payments as low as 3%. There are also government-backed mortgages like FHA loans, which allow down payments starting at 3.5%, and VA loans and USDA loans, which may require no down payment at all. Depending on the loan, you may have to pay for mortgage insurance, but you may decide this is a worthwhile trade-off if it gets you into a home sooner. Meet with a mortgage loan officer to determine what types of loans you could qualify for, how much house you can afford and how much of a down payment you’d need. That will inform how much you need to save, and who knows — it may be a lot less than you think! While real estate has traditionally been considered a safe long-term investment, recessions and other disasters (like the COVID-19 pandemic) can test that theory—and make would-be homeowners think twice. During the Great Recessions many homeowners lost money when the real estate market crashed back in 2007, and ended up owning homes that were worth far less than the price at which they were purchased for many years after.If you are buying the property on the belief that it will rise in value over time, be sure to factor the cost of interest payments on your mortgage, upgrades to the property and ongoing, and routine maintenance into your calculations.
“By definition, saving – for anything – requires us to not get things now so that we can get bigger ones later.” — Jean ChatzkyTweet
2. Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for.Generally speaking, your housing expense should not exceed 28% of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment. The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any. With mortgage rates at about 4.5 percent, this will translate into a mortgage loan amount of about $177,500. To arrive at the amount that you can afford to pay for a house, you’ll have to add the down payment on top of that. In today’s tight lending market, you should generally expect to make a 20 percent down payment on a house. No, that’s not a requirement–it’s just the minimum down payment to get the best-priced deals.You can certainly put down less, but you will likely be paying a higher rate and, if you have any kind of credit issues, you may not be able to get a mortgage at all. Now that you’ve started saving for your down payment, where is the best place to put the money I’m saving for a down payment?
In most cases, a down payment is not an investment. Unless you plan to save for five years or more for a down payment, you just need to park the money somewhere. A money market savings account will get the job done. You won’t make any money on your money, but you won’t lose it either. Look into a high-yield savings or money market account for holding the down payment funds. You generally get a bit more interest in these accounts than you do in a regular savings account.
Check out a certificate of deposit, called a CD. You have less flexibility and liquidity with these accounts, but the principal protection and yields can be attractive when compared to a typical savings account
So, let’s say you have 24 months before you want to buy a home, and you decide to save $40,000 to cover your down payment plus closing costs and other moving expenses. Now you’ve got your goal set up! Here’s how to find that kind of cash and fast-track your savings!
**** Cut Some Expenses in Your Budget Immediately ***
You’ll be amazed at how much money you find just because you’re paying attention to your spending. To read my post on becoming an aggressive saver, click HERE. Another you’re paying attention to your spending. Here are some ideas to help you tighten your spending temporarily while you work on piling up cash for your new home:
- Take a break from the gym: $60 per month . Work out at home
- Make you own coffee and skip the Starbucks run in the morning-$100 per month
- Bring your own lunch to work daily, no eating out: $50/week
- Save eating out for special occasions: $250 per month
- Trim your clothing budget: $100 per month
- Buy generic brands at the grocery store: $160 per month
- Cut the cable: $60 per month
These tips could save you $630 every month! That adds up to more than $15,000 over the course of 24 months. You can always get creative and find even more ways to save!
3. Temporarily Pause on Retirement Savings– If you’re planning on buying a house in the near future, temporarily stopping your retirement savings and redirecting those funds toward your down payment can be a great idea if you do it for a short period of time (think two years or less).If you’re currently investing $500 a month into 401(k)s and IRAs, that means you could save around $12,000 in two years. That’s a big boost to your savings timeline especially if you currently put a sizable chunk of every paycheck into a retirement account! Once you’re done, you can jump right back into saving for retirement. Refer to my post on 6 Tactics to Give your Retirement Savings a Boost, click HERE. That will get you back on track in no time.
Words of Advice – Do not borrow from 401 K or cash out your retirement accounts in order to save up for a down payment. Not only will you get hit with taxes and early withdrawal penalties, but you’ll also cripple the long-term growth of your retirement savings. It’s a mistake that could cost you hundreds of thousands of dollars at retirement. Caveat: This might not be advisable if you’re close to retirement. But if you’re young and actively contribute a percentage of your income to a retirement plan, like a 401(k) or IRA, consider temporarily diverting that money to down payment savings. Carrying a lot of debt makes it more difficult to save for a house, since a chunk of your income goes toward repayments. That debt load can also make it more difficult to qualify for a mortgage. If you have debt, do whatever you can to reduce it. If you have student loans with high interest rates, consider refinancing them to lower your payments. To Purchase my Guide to Paying off Student Loan Debt, click HERE. If you have high-interest credit card debt, pay off as much as you can and consider transferring your balance to a low-interest card. To read more about paying off credit card debt, click HERE.
4. No extravagant spending i.e. no elaborate vacations (that alone can save $3,000-$10,000). During this time some people tend to find a second job to get them to their down payment goal even faster. You probably won’t have to do it very long, but it is a good option to get to your end goal even faster. When your family asks what you want for your birthday, Christmas or Hanukkah, anniversary or any other special occasion, tell them you’d love to forgo tangible items and instead receive gift money that you can put toward a house down payment. While not everyone may oblige, some of your relatives may enjoy knowing they’re helping you attain your dream of home ownership. With the gig economy continuing to expand, there are ways to make a quick buck to help boost your down payment savings. Consider spending a few hours a week driving for a ride share service, shopping or delivering meals for an online delivery service, walking dogs, pet sitting, charging self-service scooters … you get the idea. Thanks to technology, there is an ever-increasing number of freelance opportunities like these that require very few qualifications and make it easy to earn extra cash you can put away for a home.
Remember you always have to keep your eye on your end goal. It may be hard sometimes when thinking of ways to cut your budget. There are some sacrifices to be made. Ultimately if home ownership is what your really want, you have to do what is necessary to get the outcome. These are first steps to a large long term investment for your future.