Finally ready to buy a home? It is an exciting journey and a significant milestone in your life. However, saving for a down payment is a challenge that must be tackled with sincerity.
A down payment is the initial, upfront payment made when purchasing a high-priced item, such as a house. The remaining amount can be paid through a loan, which you can repay over time with interest. Therefore, before you apply online for a home loan, it is paramount to plan in advance and take steps to save money for a down payment.
According to a 2023 survey by NAR, 38% of first-time homebuyers stated that saving for a down payment was the most difficult step in the home-buying process.
How much do you need to save for a down payment?
The money you need to save for a down payment depends on various factors and the type of loan you are applying for. As a rule of thumb, coughing up 20% of the house as a down payment means a lower principal balance and no need for mortgage insurance.
- Conventional loans – These loans, such as mortgage loans, allow down payments of only 3% of the purchase price. But remember, a down payment of less than 20% means having to pay private mortgage insurance.
- USDA and VA loans – You don’t need to worry about a down payment if you qualify for these loans. These loans don’t require a down payment.
- FHA loans – These loans require a 3.5% down payment of the purchase price. To secure an FHA loan, you would need a credit score of a minimum of 580.
- Jumbo loans – These loans are for home purchases exceeding conforming loan limits set by the Federal Housing Financing Agency. These require a higher minimum down payment of between 10 and 20%.
How to save for a down payment: Helpful tips and strategies
As you can understand, saving for a down payment is no mean feat. It requires dedication, discipline, and a combination of methods to save such a large amount. Here are some helpful tips you can consider:
- Live a budgeted life
Creating a budget is the first step. Review your income and expenses so you can come up with a savings plan. Having a budget will help you stay on track with your financial goals and maintain accountability.
When creating a budget, consider your monthly, post-tax income. Then, assign a specific figure to each category of expenses. Make sure the non-negotiables, such as housing, utilities, and groceries, are on top of the list.
Don’t forget to review your budget every month to find more ways to save money. Also, try to stick to the budget and curb unnecessary expenses. Think of the bigger picture!
- Review your savings plans to get better returns on them
It is also important to pay attention to where you are saving your money for a down payment. Don’t keep the funds in your checking account, as that might tempt you to spend it.
It would be best to use a separate savings vehicle offering better returns so your money can quickly grow. Here are a few low-risk ways to earn higher returns on your down payment fund:
- CD (certificate of deposit) accounts – CD accounts offer a higher return than savings accounts. The catch is you have to keep your money parked for a specific term, which can be anywhere between three months to ten years. You can withdraw the money once it matures.
- High-yield savings accounts – Compared to regular savings accounts, high-yield savings accounts offer a higher APY (annual percentage yield).
- Money market accounts – These accounts offer competitive APYs and might even allow ATM access and check writing. However, you need to check the monthly maintenance fees and minimum deposit requirements before opening a money market account.
Besides these, you can consider investments or other methods offering higher returns. Consult a financial expert to make an informed decision.
- Find ways to increase your income
Reducing unnecessary expenses is helpful but only a small step towards your financial goals. You can reach your savings goals faster by exploring ways to increase your income.
Here are four ideas to consider that might help you bring in more money each month:
- Ask your employer for a raise if you have recently helped your company snag a deal or completed a project on time. Document your accomplishments and have a conversation with your employer.
- Look for higher-paying positions in your field.
- Use your existing skills to get a side hustle. You can take advantage of gig economy opportunities or freelance.
- Sell unwanted and unused items via garage sale or online marketplaces.
These are a few ideas to get your creative juices flowing. Analyze your skills and interests, do some research, and decide the best way to increase your monthly income.
- Look into the various down payment assistance programs
Your state or city might offer down payment assistance programs to help cover some of the costs of your house. For example, if you have not owned a home in the past three years, you might be eligible for first-time homebuyer programs.
Please note that each program has its specific eligibility requirements. You can leverage these programs only if you meet their eligibility criteria.
So, start searching for home-buying programs in your area online. If you are lucky, you might even stumble across lenders offering their own down payment assistance programs. Take Bank of America, for example. They offer a Down Payment Grant program of up to 3% of the purchase price. If you qualify for this program, the lender will pay 2%, and you will have to cover the rest 1%.
Summing Up
To conclude, saving for a down payment is a daunting task but not impossible.
Curb your unnecessary expenses, create a budget and stick to it, leverage savings vehicles offering higher returns, find ways to increase your monthly income, and take advantage of down payment assistance programs to make your dream of owning a house a reality.
Don’t waste more time! Start saving from today to quickly meet your down payment fund goals.