How to save for a down payment on a house is a legit concern for anyone thinking of becoming a home owner.
Going into debt, regardless of the reason, is generally a bad idea.
Without certain loans though, some goals would be impossible to achieve! One of them is becoming a home owner.
For some, setting up a 6 month emergency fund is difficult enough.
Many aren’t done paying off old debt yet. Others have children and a family to think about.
How are they gonna save tens of thousands of dollars to buy a house in the meantime?
Buying a home with cash would truly be an amazing financial accomplishment but not many can achieve such savings levels though.
The next best thing is applying for a mortgage, after having saved for a substantial down payment.
The more money you put towards your down payment, the less your mortgage will cost!
How to save for a down payment on a house
How much house can you afford?
Everyone should be aware of how much they can actually afford to spend on a new home.
You can buy homes for $1M, or you can buy one for $200,000. It all depends on your income, on where you’ll settle down, on how much house you actually need.
Personally, I’d love a small home, with yard and a garden, somewhere far away from the city. In theory, that shouldn’t cost a big fortune, just a small one.
Others, though, dream of living in a big mansion, with many rooms and a yard the size of 10 baseball fields!
The important thing to think about before starting to save for your down payment, is how much can you afford to spend on a new house.
Figure out your down payment
Ideally, you should save 20% for a down payment.
Once you know how much you can afford to spend on a mortgage, you should know, more or less, what to aim for: what is 20% of your affordable house price range?
Of course, saving more than the bare minimum is even better.
The more you can pay with cash, the less your loans will cost in the long run!
Saving less than 20% for a down payment comes with consequences though.
First of all, your offer will look less appealing to the seller. If more buyers are interested in the same property, the ones who can fork out a substantial down payment will have an advantage.
You can still apply for a mortgage though, and you can get approved as well. The bad news though, is you’ll be seen as a risky borrower.
You may have to pay a PMI (Private Mortgage Insurance). This is requirement for anyone paying less than 20% on a down payment. Apparently, smaller down payments are ‘risky business’ in the eyes of mortgage lenders.
Your interest rates will be higher as well. Sure, the better your credit score, the less interest you’d have to pay. But the size of your down payment counts as well.
Check your credit score
Since saving for a down payment might take a while, put this time to good use!
Check your credit score and aim to improve it!
It’s well known that the better your credit score, the better the terms of your loan!
Now is the time to check your credit history for errors, start a dispute if necessary, attempt to improve it.
Do what it takes to raise your credit score. It will truly help a great deal!
Open up a savings account
Inevitably, you’ll have to start saving somehow!
Opening up a savings account is the first thing that comes to mind when it comes to saving.
There are advantages and disadvantages that come with savings accounts. And there are other ways to save money for a down payment on a house though.
You could start investing. Certificates of Deposit are also an option. Opening up a high yield bank account.
Depending on how long it may take to reach your goal, you could save your money the best way you see fit.
The important thing is to have a plan in place!
Make a budget
Saving for a down payment on a home is a serious matter.
Without a clear budget in place, you’ll most likely be unable to reach your goal.
Use a spreadsheet, install a budget app, it really doesn’t matter how you do it, but start budgeting.
Know how much income you have available and how you usually spend it.
Add a “home down payment” category and aim to save as much as possible towards your new financial goal.
Cut unnecessary expenses & save more
Don’t cheat yourself out of a substantial down payment!
Make sure you cut all unnecessary expenses, if you plan on reaching your goal within a certain time frame!
Give up on some nights out and eat at home. Redirect that money towards your down payment.
Buy less clothes, shoes, buy less of everything you know you can live without, and save that money for your down payment.
Other ways to save more money include:
- Save money on electricity
- Save money on your water bill
- Save money on vacation (you don’t have to give up on your vacation to save for a down payment)
- Save money on your car expenses (no need to sell your car to save more money!)
- Save money on housing expenses (downsize and significantly reduce your housing costs!)
- Save money on short city breaks (no need to stop travelling altogether!)
- Save money on food (eat well on a budget)
All in all, aim to spend less and save more!
Use windfalls to top off your down payment savings
Unexpected money windfalls are a great way to top off your savings!
An inheritance, a raise, that extra paycheck. Any extra money you didn’t budget for can help you save more for your down payment.
It might be tempting to splurge on yourself first because, how often do you get to do that, right?
But free money can be a great way to reach your goal even faster.
I’d argue splurging with windfall money is a waste, but that’s not a very nice thing to say.
I’ve splurged on “stuff” before, literally using unexpected money.
However, I aimed to only splurge a little! Putting most of a financial windfall into your savings account can do wonders when you’re trying to reach a big, important financial goal!
Set a time frame
In order to make sure you’re going to become a homeowner this century, set a time frame to reach your goal.
Say you need to save $50,000 for a down payment.
How much can you set aside each month? Can you reach your goal in 3 years? Would making more money sacrifices get you there in 2?
Having a time frame in mind, even if imaginary, can motivate you a great deal!
Saving for a down payment on a house is, without doubt, one big financial goal.
It’s worth it though, if it will help you save tens of thousands of dollar (or more) in the long run!
If you’re serious about buying a new home, then it’s time to think of plan and take action!
Have you successfully saved for a down payment on your own home?
What strategies helped and motivated you save?