Keywords to optimize the article for: home down payment, how to save for a house
Are you ready to put down roots this year?
If you’re thinking about buying a house, it’s important to make sure you’re financially ready to do so. If you come prepared with a down payment, you could lower the total cost of your mortgage. You could also avoid costly private mortgage insurance (PMI), which increases your monthly invoice.
Not sure how to save enough money to cover those costs? Today, we’re sharing a few of the best ways to budget a home down payment, and how you can get started today.
1. Plan Your Budget
Your home is one of the biggest and most important investments you will ever make. It’s important to treat it like the major expense it is, and budget accordingly for it.
This means understanding what you can expect to pay for a house in the community you’re eyeing. You can do some research on local selling prices to understand what homes are going for, and use that data to gauge your anticipated costs.
Then, you can talk to local lenders to understand their financing options. This will give you a clearer picture of how much you may need for a down payment.
While budgeting for your home, don’t forget to include other one-time expenses, such as closing costs or relocation costs. Instead of allowing your money to sit in a traditional checking account, consider allocating it to a high-yield savings account. That way, your money can work for you until you’re ready to use it.
Related Article: First Time Homebuyer Tips
2. Cut Unnecessary Expenses
Are you currently splurging on a specialty coffee every day of the workweek? Do you subscribe to a thousand different streaming platforms but only use one? What about magazine subscriptions, paid mobile apps, and other luxuries you could do without?
While cutting out your morning java won’t generate a windfall of cash, it can put you closer to your financial goals. If you’re saving money for a home down payment, this is one easy way to start. Here’s a list of 13 unnecessary expenses that could be eating into your budget.
3. Research Different Types of Loans
Some lenders want you to believe that putting down a 20% down payment is the only way to go. While it’s true that going this route will help you avoid PMI, it’s not your only option.
If you’re researching how to save money for a house, it’s important to understand all of your different choices. Let’s take a look at a few of the most common loan types and how they work.
Most mortgages are fixed-rate, conventional loans. This means that you will agree to a set price with your lender, as well as a set timeline. Then, you will divide the total price by that timeline (expressed in months).
This shows you how much you will be required to pay each month. By the end of the timeline, you should have paid off the entire mortgage. While these loans are straightforward, they are guided by standards set forth by federally-backed mortgage companies, including Freddie Mac and Fannie Mae.
These companies set strict guidelines around loan approval and acceptance. This can make it more difficult for homeowners to secure a conventional loan, especially if their credit score is lagging. However, if you have a solid credit history and strong financials, you may be able to put a down payment on a conventional loan for as little as 3% of the total mortgage.
VA loans are distributed and backed by the U.S. Department of Veterans Affairs (VA). With this type of loan, you can skip a down payment altogether. However, they’re more difficult to pursue.
These loans are only open to current and former U.S. service members, as well as their qualifying spouses.
FHA loans are distributed and backed by the U.S. Federal Housing Administration (FHA). You can find FHA loans that require as little as 3.5% as a down payment.
This isn’t always the case, and your credit score will influence the down payment you will pay.
USDA loans are distributed and backed by the U.S. Department of Agriculture (USDA). Like a VA loan, a USDA loan will not typically require a down payment. However, there are income limits that define how they work, as well as geographical limits to consider.
There are different loan programs within the USDA loan umbrella. To learn more about each program and determine your eligibility, you can visit the USDA website.
Related Article: How Much House Can I Afford
4. Automatically Deposit Earnings
You won’t miss what you never see. Keeping that in mind, consider drafting a portion of your earnings into a designated savings account with each pay period.
You can set this draft up with your bank, or talk to your employer about managing the allotment on their end. This is a smart and seamless way to beef up your savings account as you save for a down payment on a house.
5. Downsize If Possible
Is it feasible to downsize and live below your means while you focus on saving money for a home down payment? This might mean moving into a smaller, more affordable home nearby, or living with a loved one to help reduce or eliminate your current housing costs.
While this is obviously a bigger move than just cutting out magazine subscriptions, it can get you closer to your goal at a quicker pace. If your next move is a time-sensitive one, then downsizing may be the transformative change that your family needs.
Once you’ve made the switch, focus on reducing your daily living expenses as much as possible. Only spend money on the things you need, and avoid spending frivolously on “extras” even if they seem like minor expenses.
6. Don’t Touch Other Savings
When you’re wondering about the best way to save for a house, you might be tempted to dip into your other savings, such as your IRA, 401(k), or emergency fund. However, we strongly recommend against taking this action.
These are accounts that you will need in the future, and you don’t want to deplete them just to meet a short-term goal. This is especially the case with an emergency fund, which you may need to cover an unexpected expense during the course of buying your home, or as soon as you move into it.
Homeownership comes with the responsibility of repairs, and an expense like a new roof could be more than you can pay out of pocket. In that case, an emergency fund could help you foot the bill.
Likewise, draining your retirement accounts now could mean incurring multiple risks down the road. You want to be able to enjoy your golden years after work, and derailing those savings could set you back on those goals.
7. Earn Side Income
According to one report, one in three Americans currently works some type of side gig. This is defined as any type of employment that’s separate from your full-time job, but still brings in income. When considering how to save for a house, some people decide to take one on to ease their financial burden.
For instance, they may choose to work for a rideshare company, like Uber. They still go to the office and fulfill their duties as an employee, but then drive in the evenings and on weekends. Or, you might turn your hobby or passion into a money-making venture, selling your wares on online marketplaces or setting up booths at craft fairs.
A side gig is a great way to supplement your full-time income. Yet, you might not have the bandwidth to take on any more job responsibilities than you already have. If that’s the case, there are other ways to earn a little extra money.
- Selling unused items in your house
- Working overtime
- Negotiating for a raise
As you think about what you’d do for a side hustle, remember to keep work/life balance in mind. Yes, you might have a few extra hours in the week that you could devote toward making more money, but don’t put yourself at risk of burnout by doing so.
8. Pay Off High-Interest Debt
Do you currently carry high-interest debt, such as a student loan or credit card balance? If so, these could lower your credit scores and make it harder to secure a low-interest loan.
Before you begin saving money for a down payment, focus on paying off those high-interest debts first. This can free up extra money each month, which you can then apply to your home savings account instead. In time, it can also increase your credit score, which could help you qualify for better loan terms.
Start Saving for a Home Down Payment
Buying a house is a major life decision. However, it does not have to derail your finances. Once you know how to successfully save for a home down payment, you can make smart choices to get there as soon as possible.
The key is to not rush this process and save steadily. With the right changes, you can make big moves in due time. Focus on paying off your debts, living below your means, and reducing unnecessary expenses.
Related Articles: What is a Good Credit Score to Buy a House