Tips For Saving For A Down Payment To Buy A Home
Purchasing a home is a goal of most people that usually falls somewhere between marriage and kids. However, a lot of people don’t have a clear plan for getting their finances in order which makes securing a mortgage that much harder.
By learning how to save for a Down Payment on a house you will gain a valuable financial skill that will serve you well the rest of your life. Namely, you will see the benefit of setting a goal and sticking to a solid plan to achieve that goal.
Step 1: Determine the Amount Needed for Down Payment
While it is always a good idea to start saving money for a rainy day, saving up enough for a home down payment needs a clearly defined path. The first step is to figure out your end goal. That means you will need to know your budget for a home price.
Most people work backwards to figure out their home price, and that is not a bad thing. Start with the amount that you now pay in rent. Then, add about 10% to 15% of the payment amount to cover normal maintenance items and the escrow amount. Once you have this figure you can use one of the many free online mortgage calculators to see how much home you can afford.
For example, if you currently pay $1,200 per month in rent, then you would need to budget between $1,300 and $1,400 per month for the new estimated mortgage amount. This means that for a 30-year mortgage with a fixed interest rate of 3.75% you would be looking at a house price of approximately $285,000 if you paid a 10% down payment.
Knowing the costs of buying a home is also important for determining the amount needed at closing.
Step 2: Put Together Several Simultaneous Plans
Most people will feel that figuring out how to save for a Down Payment on a house in the range of $20,000 to $40,000 would take a lifetime. However, it does not have to be so overwhelming. Those that have successfully saved such a large amount have found that various plans put in to place at the same time yield the best results.
- Start with a bang – too many times people will start with a $5 or $10 investment in their local savings account. However, if you have an extra $100 or $1,000 it is better to start off really big. This will make you feel like you have accomplished a first big step and help you stay motivated to keep saving.
- Do it automatically – you likely have 2 options for automatic savings. First, if your employer automatically deposits your paycheck to your local bank or credit union, you can ask your payroll department to modify your deposit. You can set aside a certain dollar amount from each paycheck to go to a certain savings account. If your paycheck is not automatically deposited or your payroll department does not offer the service, then you can talk to your bank or credit union to set up the automatic deposit from your checking account to your savings account.
- Set aside bonuses and even raises – If you receive some type of extra money from work in the form of a bonus or a raise, set that money aside in your savings. It can be real tempting to spend it on something like a new TV or a weekend getaway. However, that will delay buying a home.
- Keep paying on your car – If you have less than 2 years to pay on your car, plan to keep the vehicle for a few years after you have paid it off. This is a really fast way to build up your savings. If you are currently paying between $300 and $400 per month for a car loan, you could potentially save up between $7,000 and $9,000 in 2 years from simply depositing the former car payment amount in your savings account each month.
- Earn extra money on the side – some people have a profitable skill that can earn them extra money away from their main job. It can be a service like mowing lawns, cleaning homes, or sewing. Others have gone to the extreme of getting a 2nd job, such as delivering pizzas part-time or working as a waiter/waitress in order to save the cash tips.
- Sell some stuff – When you are close to completing your goal, look around your place and see if there are things that you no longer need. Sites like Craigslist, eBay and even local Facebook groups make it easy to get rid of old clothes, old shoes, electronics and a host of other things in order to make some quick cash.
Step 3: Put Interest to Work for You
After you have figured out how to save for a Down Payment on a house and you have built up a bit of a nest egg, let the money work for you. Over time, interest can help you reach your goal faster. However, you need to be wise with your choice of investments.
One rule of thumb is to stay away from stock market investments if you plan to buy a house sooner than 7 to 10 years. While the stock market is a great way to invest money for the long term, it can be volatile in the short term. Here are some wiser choices to consider.
- Money market account – A money market account offered by your local financial institution will normally have a slightly higher interest rate than the typical savings account. Money market accounts also limit the number of transactions you can have in a month so it conditions you to leave the money alone.
- Certificate of Deposit – A certificate of deposit AKA cd will also have higher interest rates than either the money market account or the savings account. With a CD you will be asked to deposit money to the account and leave it untouched for a specific period of time such as 6 months, one year or 3 years. The higher terms will pay the highest interest rate. It will likely be a good investment in time to shop around various banks and credit unions in your area to find the best interest rate.
- High yield savings – Certain financial institutions will offer a high yield savings account. The term means that the account pays more than the regular savings account offered to the general public. These accounts will usually have a larger minimum balance and limit the number of withdrawals you can make in a month.
Bonus Step: You May Not Need That Much in Savings
We saved the best for last. While it is true that learning how to save for a Down Payment on a house can teach you financial discipline, it is possible that you may not need such a large amount. If you choose to go with one of the low down payment loans, your nest egg may only need to be a few thousand dollars in order to qualify for a mortgage.
For example, a qualifying military service member could meet the requirements for a VA mortgage. These loans do not require a down payment of any sort. The USDA loan also does not require a down payment. The USDA loans are available to people with decent credit scores and annual household income that falls below a certain threshold. Finally, there is the popular FHA loan that only asks for a 3.5% Down Payment rather than a 10% or 20% Down Payment.
Regardless of the type of mortgage you choose, it will likely take some time for you to save up the money needed to qualify for a home mortgage. This will give you time to strengthen your credit score and teach you financial discipline that will enable you to have a healthy financial future.
Insight From Top Agents
I reached out to Anita Clark, a Warner Robins GA real estate agent, who provided the following insight on how to save for a home down payment:
There are many ways you can generate funds to come up with a suitable down-payment on a primary residence. For instance, you can use the proceeds from a recent tax refund to put down on the property. Depending on the price of the home, and the amount of your refund, going this route may provide a sizeable down-payment without having to touch any other savings or funds held in reserve.
Another way you can generate funds is to utilize a grant. The good part about grants is you rarely have to pay the money back as long as occupy your home for a certain time-frame. Organizations such as the National Homebuyers Fund, the U.S. Department of Veterans Affairs (no down-payment!), U.S. Department of Agriculture, have options you may qualify for. In fact, less than 10% of U.S. buyers apply for down payment assistance (DPA) programs although there are numerous options available. If not sure where to begin, check with your mortgage lender who can help you determine if you qualify for a DPA, and which ones to apply for.
According to the National Association of Realtors in their “2015 Profile of Home Buyers and Sellers” report, one of the most difficult steps for new buyers in the home buying process was saving for a down payment. Thankfully, all hope is not lost as there are plenty of options buyers can employ, especially if they think “outside the box” to help generate a reasonable down-payment on the property of their dreams.
Along with the tips provided by Anita Clark we also solicited some input from Ryan Fitzgerald, Owner/Realtor® at Raleigh Realty. Here is their take on the subject.
Thanks for the opportunity to address your article Kyle, and for inviting me to contribute Luke…
Let’s start by debunking one of the most common home buyer myths and the #1 reason people don’t buy a house.
You need a 20% down-payment to buy a house right? WRONG!
You can buy a house with much less than a 20% down-payment.
The real question is how much money will you need and how fast can you save to take advantage of these low interest rates!
Some states, offer some great programs for a first time home buyer or even a move up buyer where you can buy a home with 0% down.
Let’s say for the purposes of this article you need 5% as a down-payment and you want to buy a $200,000 home…. 200,000 x 0.05 = 10,000. You will need $10,000 as a down-payment in this scenario.
Tips on Saving for a Down-Payment….
In 6 months to a year
Saving for a down-payment is easy, it’s not simple. It takes strategy, discipline and hard-work.
In our example we are going to give you creative strategies on how to save for a house in a short timeframe.
One of the best ways to save for a down-payment quickly is to open a separate bank account. Opening a separate bank account and applying a certain amount of funds to it with each paycheck will help you.
In our above example you will need to contribute $400/week to save for a down-payment in 6 months, and $200/week to save for a down-payment in a year.
In some cases a separate bank account may not be enough.
Maybe you don’t have the income to support opening an additional bank account and contributing this amount. Contribute what you can and use other strategies to help such as creating more income, or reducing unnecessary expenses.
Let’s say you can only manage a contribution of $100/week, this means you need to find another $100-$300/week in additional income, or by reducing your other expenses
If you need to earn $200 extra per week, how are you going to do it?
You could start by asking your boss for a raise. If that doesn’t work you can pick up extra hours at work or grab a part time job. You only need to do this for 6 to 12 months to save for a house.
Working weekends is a great way to increase your income and savings. Working for UBER or LYFT can help increase your income. You can put in an easy 16 hours every weekend and pick up 2, 4 hours shifts during the week. Let’s say you make $11/hour this gives you $264/week which should equate to nearly $200/week after taxes.
If you have a lot of things you don’t need any more a yard sale is a great way to earn some fast extra cash, it also reduces the load when it comes time to move into your new house! You can also post to Craigslist and sell some of your items you may not need anymore. Some yard sales can earn greater than $1,000 depending on the items you sell.
Reducing your expenses is another great tip on saving for a house.
Do you buy lunch every day? What about that morning coffee? Are you using the gym or just paying that membership fee?
Let’s say a coffee lunch combo equals $12/day. That equates to $60/week or $3,120/year. If you meal prep on Sunday’s you can cut your those same food costs down to $4/day pretty easily and save yourself $2,000/year.
What other expenses do you have that may be unnecessary?
If you can find another way to reduce your costs by $8/day that’s another $2,000 in savings over the course of a year!
Other Top Mortgage Resources
- How to Get The Best Mortgage Rates via Storify by Bill Gassett
- Top 10 Frequently Asked Questions Regarding Mortgages
- 20 Important Mortgage Terms To Know by Paul Sian
- Why Do I Need to Get a Mortgage Pre Approval? by Lynn Pineda
- The Benefits of Private Mortgage by Teresa Cowart
About The Author: This article was written by Luke Skar of Inlanta Mortgage – Madison which serves Wisconsin, Illinois, Minnesota and Florida. Since 1993 Inlanta Mortgage has provided award winning customer service to clients who need to purchase a home or refinance an existing mortgage.
Luke serves as the Social Media Strategist for Inlanta Mortgage. His role is to provide original content for all of their social media profiles as well as generating new leads from his website, MadisonMortgageGuys.com NMLS ID #1016
About Rochester’s Real Estate Blog: The above article “How To Save For A Down Payment On A House” is hosted on Rochester’s Real Estate Blog which is run by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
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