6 Tips for Saving for Your First Down Payment
Been browsing homes much? It can get addicting. Then reality strikes, or maybe it hasn’t yet, but you’ll end up thinking about how much you can actually afford soon enough. So how much can you afford? Well that all depends, aside from your income, credit history, and debts or all other monthly expenses you have, your down payment will help you get a clearer picture of your dream home. Meeting up with a mortgage banker before looking at homes can help clarify those details for you.
The ideal is to have 3% – 20% of the home you want saved up, depending on your situation and whether or not you qualify for government insured loans like the VA, USDA, or FHA loan.
Regardless, aside from down payments, always expect other possible expenses upfront, like possible closing costs, initial repairs not covered by the seller of the home, or other possible fees. So saving up is great even if you don’t have to put money down, and here’s how it can be done.
Set goals and make it automatic
It seems too simple, but make your transfers automatic. Every time you get a pay check, a percentage of it should go into your savings just for a down payment. Soon enough you’ll forget what your paycheck looked like before the automatic transfer and you’ll learn to be frugal and save. Plus, having it done automatically makes it a less painful breakup.
Before you figure out how much you should be putting into your savings for a down payment, meet or call a mortgage banker to figure out what’s realistic while making you happy. If qualify for a government-insured loan then you could set different budgeting standards to save for a down payment — since some government-insured loans have 0% down payment. You would need to plan for other possible instead.
Use your tax refunds right
Rather than treating your tax refund as a bonus for you to splurge on something, put it into your savings account right away. This way, it’s like you never received it in the first place, but trust me, you’ll be thanking yourself for having done it when the time comes.
Inspire your goals
Have a Pinterest account? Or maybe you enjoy looking through magazines? Whatever you use to browse homes, pin, cut out pictures, take screen shots of them, and save them somewhere for you to revisit on the regular. Look up the price of similar homes in your area, then take at least 3% – 20% of that home. The result is the ideal amount to have saved up for that particular house. Getting a realistic understanding of the price of such homes will help you start saving as much as possible.
Cut down on expenses
This is also pretty basic and broad because I don’t know what your expenses are. But, cutting down on dinners out, especially on weekends, can help you spend less. Meal prep for your week so you only buy what you need and not go over-board with grocery shopping. If you buy clothing, sell the stuff you haven’t worn in the last 6 months. Better yet, cut down on the shopping unless it’s something you really can’t live without.
If your phone still works after 2 years of using it and you’ve paid it off, don’t upgrade and add to your monthly payments until it is absolutely necessary. That alone could save you $20 – $30 a month for a few months if not another year. If you’ve paid off your car, don’t go buy a new one. Stick to what you’ve got if it works until you’re in your new home.
Use the rights rewards
It’s not ideal to open up a bunch of credit cards because that could be bad for your credit history. But if you’re starting out, opt for a cash rewards credit card instead of travel points. That way whenever you use your credit card you get cash back that you can put straight into savings. It should’t be your primary method of saving, but a little bit added up over a long period of time can make a difference. And make sure you’re being wise with your credit card, the last thing you want is bad credit.
Start off strong
Get really frugal for the first 2 months and add much more than you would later into your savings. By having a decent amount added into your savings initially, you’ll be motivated to keep adding to it. Planning on putting $500 in your account every month? Put $800 to $1,000 each month for the first 2-3 months, then start adding $500 every month after that.
The best way to save is by making a habit out of saving. The more consistent you are with saving, for example you put that $500 into savings every single month, the more saving up will get easier for you; that should be your primary method of saving. Then, whenever you get bonuses, tax refunds, or cash rewards, add those in there to speed up the process without stopping your $500 a month routine.
If you can’t quite reach the 3% – 20% mark, there are down payment assistance programs that are worth looking into.
For instance, for low-middle income homebuyers, some mortgage lenders, like Atlantic Bay, also offer state bond programs. Some state bond programs offer a piggyback loan for the down payment as part of the mortgage loan or down payment assistance grants. Speaking with a loan officer will help you start your planning and savings process since they can better tell you where exactly you stand in the home buying process.