Saving up for a down payment on a home can be a challenge, especially in today’s economic climate where wages aren’t increasing at the same rate as rental prices. However, there are a few saving strategies that can help. In today’s post we’ll look at a few of those strategies and offer practical tips on how to grow your savings enough to make sizable down payment.
How much do I need for a down payment?
For most buyers in today’s market, financing the purchase of a home through a mortgage is the only feasible way to obtain homeownership. According to Zillow, the median price of single-family homes in the U.S. currently around $230,000. It would be unrealistic to expect most buyers to have that kind of cash available. But even with a mortgage, most buyers have to have at least some cash on hand to make a down payment. The typical amount is 20%, although it can vary greatly depending on the buyer’s scenario and the terms of the loan.
1.) Talk to a Mortgage Lender
It may seem counterproductive to start the mortgage application process before you actually have the money saved up for a down payment, but it’s actually a wise approach. Why? Because if you find out how much you’re qualified to borrower first, you’ll have a better idea of how much money you need to save for a down payment.
2.) Calculate Costs and Set a Goal
Once you’ve figured out how much money you’re qualified to borrow, you can set your home buying budget and start a savings goal.
Let’s say your mortgage lender pre-approved you for $200,000. If you were to make a 20% down payment on this amount, that would come to $40,000. Now ask yourself how soon you want to buy a home. Do you want to buy within the next three years? Five years? One year? Let’s say you want to buy a house within three years. Now you should ask yourself if you think you can realistically save up $40,000 in that amount of time. If the answer is yes, then great! If the answer is no, then you may need to reduce your home buying budget. The other option is to consider making a smaller down payment — which is often possible, but usually comes with additional long-term costs that we’ll talk about later.
3.) Consider Low Money Down Financing
For the purposes of this post, let’s say there’s no way you can accumulate $40,000 in such a short amount of time, so you consider lowering your home buying budget to $150,000. Twenty percent of $150,000 is $30,000–better than $40,000 but still too much. Your choices now are to lower your budget even further, which may significantly change the type of home you can buy, or you can look at low money down loan options.
Popular low and zero money down mortgages include FHA loans, USDA Rural Housing loans and VA loans. Even conventional mortgages will sometimes allow the borrower to pay less than 20%; however, the borrower will typically be required to pay additional fees through private mortgage insurance (PMI).
Just remember, when considering low and zero money down home loans, you are usually trading the higher upfront costs for longterm mortgage insurance fees or higher interest rates. It’s important to weigh the costs and savings for each of these options to see if they are worth is for your scenario.
4.) Make a Plan and Start Saving!
You’ve spoken with a lender. You know how much house you can afford. You have an idea of the type of loan you’re going to get. For our example, let’s say you decide on a low money down FHA loan. These loans allow as little as 3.5% down, and what’s even better, the money for your down payment can be in the form of a gift (not all loans allow that).
So with an FHA loan, a $200,000 home would need only $7,000 as a down payment. Your monthly payments would be somewhere around $1,150 (assuming you have an interest rate of around 4.7%).
Now that you’ve crunched the numbers, it’s time to get serious about saving up that $7,000 and put a plan into action. A good place to start would be to thoroughly examine your own spending habits and find places where you can cut back. You can also work from the other direction and focus on earning more money.
Not all of these will work for you, but here are a few ideas:
- Cook more, eat out less.
- Buy secondhand as much as possible.
- Sell items you no longer use or need.
- Consider getting a second job.
- Consider asking for a raise.
- If you have extra space, consider getting a roommate to split the bills.
- Move back in with your parents.
- Have a special artistic skill like photography, writing or drawing? Consider doing freelance or commission work.
- Consider asking a parent or close relative to give you part of the cash you need for your down payment. Remember, the FHA loan program allows gift funds, meaning the money has to be given without the expectation of the borrower paying it back.