Saving for a down payment on a house is one of the most difficult things to do for a first-time home buyer. In addition to the sheer financial difficulty of saving for a down payment on a house, there is also the question from home buyers regarding how much they need to save. In the article that follows, we aim to answer all of those questions and more as we share details about how to save for a house down payment.
What is the Minimum Down Payment for a House?
Saving for a down payment on a house is actually within reach for many of those who may think otherwise. The myth that you need to save 20% for a down payment is just that – a myth. In fact, some mortgage loans like VA loans and USDA loans require no money down. If you are a first-time home buyer and your preference is a Conventional loan, you may be able to get in to a home with as little as 3% down. And on an FHA loan, the down payment requirement is only 3.5%.
So, if you felt that the only way to buy a home is to save for a large down payment, that is simply not the case. There are multiple down payment options of 5% or less, the best thing to do is to speak with your loan officer to learn about which loan option is the right fit for you.
How to Save Money for a House
Now that you have determined that you don’t need to save for a large down payment to get into a home, you need to set some goals for how much you need to save, how long you want the saving to take, and plan a road map for how you plan to reach your savings goals.
I find that clients who are motivated enough to set goals and have a plan, generally will stick to the plan and save the required funds. Sometimes life throws a few roadblocks in your path, and it takes a bit longer than planned to save the necessary funds, but by following a plan you can reach your goal and buy your first home. Doing nothing is not an option. Write down your goal, set up a savings plan, and get started saving this month.
Set a Savings Goal
The first step is to determine how much you need to save to buy a home and use that number as the starting point for your savings goal. We shared the down payment requirements above for buying a home, now lets calculate a real world mortgage down payment example. You can do this with any price home, but for our example we are going to use a home price of $350,000 with a 3% down conventional loan as a first-time homebuyer.
Home Price: $350,000
Down Payment 3%: $10,500
So, the savings goal for the target home price is $10,500 which I feel is quite reasonable to own a home. The next step is to now decide how long it will take to save up that amount of money.
Determine your Savings Timeframe
Now that you are on the path to becoming a homeowner, how long will it take for you to reasonably reach your savings goal. Based on your current income and expenses how much can you expect to reasonably save per month towards your goal? If we make this easy, and we say you are going to save like this is a car payment, then the plan should be to save on an automated savings plan the same amount each month. With that said, let’s look at a 1-, 2-, and 3-year savings goal for our target home price.
Savings goal
$10,500 – 1 year: $875 per month savings
$10,500 – 2 year: $437.50 per month savings
$10,500 – 3 year: $291.67 per month savings
If you look at the numbers, the 2-year and 3-year savings goals are less than the average car payment in the U.S. So, if many people feel they can afford a car payment of $300 to $400+ plus then saving for a home should be within reach of a lot more people than are currently buying a home.
So, if it is so easy why don’t more people save the money? It comes down to having the belief you can do it and the motivation to see the goal from start to finish. If more people were aware how reasonable down payments can be, I am quite certain that more people would put themselves in a position to save for a home.
Sit Down and Take an Honest Look at Your Budget
Most of us have monthly expenses that are must haves like our utility bills, groceries, and insurance. Then we also have our monthly luxury expenses like eating out, shopping for clothes, travel, and entertainment. I understand you can’t cut out everything and you have to live your life. But if you want to save for a mortgage down payment then this is the time something has to give if you want to buy a home.
Now is the time to take a hard look at how much you are spending on expenses like dining out, shopping, entertainment and travel. Also take a look at how many monthly subscriptions and memberships you are paying for that you are not using and are no longer necessary. Haven’t been to the gym in months, replace the gym with walking, biking, and home workouts to save money each month.
Be aggressive at cutting unnecessary expenses so you can dedicate as much towards savings as possible. Automate your savings right away so you pay yourself first each month and your savings accounts build up quickly.
Streamline your Monthly Costs
Sometimes there are monthly savings sitting right in front of us in the form of our monthly expenses. What I mean by that is we pay our monthly bills and expenses each month, and sometimes there are opportunities to trim our expenses in ways we might not have even thought of.
Here are some examples:
Put Student Loans on an income-based re-payment plan (IBR), if possible: Give your student loan servicer a call to see if you qualify to lower your monthly student loan payments by going on an income-based repayment plan. This may be an excellent option to lower your monthly payments in line with your monthly income.
Refinance the Car Payment to Save Money: with the average car payment in the U.S. moving past the $500 per month mark in 2021, there is ample room to save money on this expense for some people. If you have owned your car and paid on the loan for at least 24 months and your payment is over $500 per month, you may be a good candidate for an auto refinance loan to lower your payment down to a level where you may be able to save $100 per month or more. Might be worth it to call your current auto loan company or a competitor to see if the possibility exists.
Pay off any Credit Cards with Balances of $1,000 or less: This should be automatic on cards with balances this low. For any cards with balances of $1,000 or less pay those off and don’t use them again until you get into a house. Having these smaller payments hurts your debt-to-income ratio (DTI) when you are ready to qualify to buy a home. So, try to get rid of these as soon as you can to eliminate this problem.
Now that you have a plan it’s time to put that plan in to action. I would be happy to help you with your plan to save money for a down payment on a house. Fell free to reach out to me anytime at steveATthehomebuyinghub.com if you have any questions about how to get started with your home buying journey.
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