Oh, the down payment. This term can feel intimidating to new homebuyers, but we are here to make saving for a down payment much easier and less stressful. Saving for the down payment is one of the most challenging parts of potential homeownership, but if you start saving early, it is not only possible to save enough but can be less difficult than expected.
What is a Good Down Payment?
Most new homebuyers believe that they need to put down 20% for their down payment. This is a common misconception and is not true. First-time homebuyers have a few different mortgage options that allow for a manageable down payment.
- Fixed-rate conventional loan – you can obtain these loans with a down payment as low as 3% down
- FHA Loan – these loans are available with as little as 3.5% down
- VA Loan – these loans do not require a down payment
There are plenty of ways to avoid the 20% down payment which could save you thousands of dollars off your expected down payment.
How to Save for a Down Payment
Saving up a substantial amount of cash can be challenging. The good news is that you can steadily save for a down payment by taking appropriate saving steps. Here are some tips for how to save for a down payment.
Plan a Savings Budget
Before you start to save, you need to know how much you need for a down payment. Start looking at homes in your desired neighborhood and consider the prices before deciding what the right budget would be for your dream home.
Once you have an idea of how much you are planning on spending on your home purchase, you will then want to consider different loan options. Your lender will help you understand what the typical down payment is for certain loan types and how much you can realistically afford.
After you discuss your loan options and desired neighborhood with your lender, it is time to start saving for your down payment. Set a goal for yourself and put aside a certain amount of money each month that will allow you to meet your down payment goal in a timely manner.
Add to Your Income
Once you decide on a monthly budget and how much to set aside each month, you may realize that your current income does not allow for much money in your down payment fund. Many prospective home buyers will boost their income by taking on a side hustle while they are saving for a down payment.
There are a lot of ways to make some extra money including working overtime, selling unused items, taking on a second job, or asking for a raise at your current job.
Do Not Spend Money on Unnecessary Things
While you are saving for your down payment, cut unnecessary spending to give your savings account a boost. Here are some things to cut down on while you are saving:
- Reduce spending money on take-out and fast food.
- Eliminate purchases of new clothing.
- Save gas money by biking or taking public transportation whenever possible.
- Forego the annual vacation.
First-Time Home Buyer Programs
If you are a first-time homebuyer, you should take some time to research first-time homebuyer programs. These are programs designed to help you achieve your goal of buying your first home by helping with the down payment. A few of these programs to consider are Fannie Mae and Freddie Mac’s down payment assistance program, VA loans, government grants, USDA and FHA loans.
The process of saving for a down payment is not going to happen overnight; it is going to take some time. If you follow the steps from above, saving for a down payment will be easier than you may think.
If you have high-interest debts, including student loans and credit cards, now is a wonderful time to start to pay off these debts. Once you have paid these debts, you will have extra money each month to put into your down payment savings. Pay off your high interest debts first, and then work on other accounts and your savings.