Down payments are one of the biggest hurdles for many first-time home buyers.
The common belief is that 20% of the sale price is required but that’s not actually always the case.
With budgeting, planning, and the right loan program—you can reach your goal of homeownership.
Read on for some tips to help you save for a down payment and take steps toward purchasing your dream home.
Create a savings timeline
The first step to planning for your down payment is to come up with a realistic savings timeline. This will help you set expectations and ensure that you’re staying on track.
Breaking down your goal into smaller, manageable chunks can make it feel less daunting and help you stay motivated.
For example, if you want to purchase a $300,000 home with a 20% downpayment in three years, you’ll need to save $60,000.
That comes out to about $1,667 per month.
If saving that much seems impossible, don’t worry. There are plenty of ways to cut costs and speed up the timeline. We’ll get to those later.
For now, just focus on setting a goal and coming up with a basic plan for how you’ll reach it.
Start with what you have
Once you have a timeline and savings goal in mind, it’s time to put your plan into action.
If you have any money saved up already, congratulations! This is a great way to jumpstart your down payment fund.
If you don’t have any saved yet, don’t worry. You can start small and increase your contributions over time. Even $50 per month can make a difference if you’re starting from scratch.
Think outside the savings account
A savings account is a great place to keep your down payment fund safe and earn a bit of interest. However, it’s not the only option.
If you have other investments, such as stocks or mutual funds, you may be able to cash them out and use the money for your down payment. Just make sure you understand the risks involved before taking this step.
You may also be able to get help from family and friends. If someone is willing to give you a loan or gift, that can speed up the timeline significantly. Just make sure you draw up a contract, so there’s no confusion about the terms of the agreement.
Some loans also have specific requirements about where the funds for your down payment come from, so make sure to clarify that before you start the loan process.
Research loan options
There are a variety of loan programs available that can help you with your down payment.
If you’re a first-time home buyer, you may be eligible for programs that offer down payment assistance or low-interest loans.
Do some research to see what’s available in your area and talk to your lender about which options make the most sense for you.
An FHA loan, for example, only requires 3.5% as a minimum down payment and has more lenient credit requirements than a conventional mortgage. If you’re a veteran or current service member, you may qualify for a VA loan which has a zero down-payment option.
Cut costs where you can
One of the best ways to speed up your timeline is to cut costs wherever you can.
If you’re currently renting, this may mean downsizing to a smaller place or moving in with roommates. You may also need to make some lifestyle changes, such as eating out less or driving a cheaper car.
New couples may forgo a large, extravagant wedding in favor of an intimate ceremony that costs less.
Every little bit you can save will help you reach your goal that much faster.
Create a budget and stay disciplined
Once you have a plan in place, it’s important to stick to it. This means creating a budget and tracking your progress regularly.
Start by making a list of your monthly expenses—this means everything from utility bills to groceries and streaming services.
Subtract your expenses from your monthly take-home pay and then decide how much you can afford to save. Anything leftover—after your expenses and savings—is what you have for spending money and non-necessities.
Working your savings amount into your budget will stop you from spending it elsewhere.
There will be months when you can save more and months when you have to cut back. As long as you’re making progress, you’re on the right track.
Pay off high-interest debts
If you have any high-interest debts, such as credit card debt, it’s important to pay those off as quickly as possible.
The interest you’re paying on these debts is money that could go toward your down payment. So, by paying them off, you can free up more money to save.
When you get a lump sum of money, whether it be a birthday gift or a tax return, use it towards outstanding debt. This will also increase your chances of being approved for a mortgage.
You may also be able to get a lower interest rate on your mortgage if you have good credit. So, paying off your debts can save you money in the long run.
Talk to a financial advisor
If you’re having trouble coming up with a plan or sticking to it, talking to a financial advisor can help.
A financial advisor can help you figure out how much you need to save and develop a strategy for reaching your goal. They can also provide guidance and support when you hit bumps in the road.
Use a CD ladder
If you’re looking for a safe place to invest your money, a CD ladder may be a good option.
With a CD ladder, you spread your money across multiple certificates of deposits (CDs) with different maturity dates. This allows you to earn more interest than you would with a traditional savings account.
It also gives you access to your money if you need it since you can cash out a CD that’s matured.
Increase your income
If you have some free time, a part-time job can be a great way to speed up your timeline.
Even if you only make an extra $100 per month, that’s an extra $1,200 over the course of a year.
There are also a number of ways to make money on the side, such as through online surveys or selling items you no longer need. You could also look into seasonal positions or food delivery services.
Every little bit helps, so don’t be afraid to get creative.
What to do once you’ve saved your down payment
The first thing you do once you’ve reached your savings goal is—take a sigh of relief and celebrate.
Saving for a down payment is a big goal, but it’s definitely achievable with planning and discipline.
When you’re ready, reach out to a reputable and trustworthy lender to get pre-approved and start your path toward homeownership.
Photo by maitree rimthong