Most people who rent actually want to own a home but there is one stumbling block…the down payment. Is it easy to save for a down payment? No. Are there strategies you could use to make it happen? Absolutely!
Among the various home loan types (conventional, USDA, FHA and VA) you typically will need to save about 5-10% for a down payment. In addition, you will need approximately $7,000 in closing costs, miscellaneous fees and reserves in the bank (preferred by most lenders).
These helpful strategies will reduce stress during the saving process while your dream of buying a home becomes a reality.
Make saving for a down payment a priority by giving up some small expenses that typically add up quickly, i.e. going out to lunch every day, a $5 latte, etc. These small sacrifices will help you focus on putting the savings first.
2. Automate It
Create a separate savings account and name it “down payment.” Automate savings deposits from your paycheck or checking account into the account each month. Start with a small amount and increase the amount over time once you get comfortable with the process. When you know your goal, you can visualize the progress you’re making.
3. Gamify It
Create a monthly challenge to raise money for your down payment. To help you stay motivated to build up your savings faster, take a look at your recurring bills. See where you may be overpaying and if you can manage to slash car insurance, storage unit fees, get faster service with your internet, etc.
4. Set Aside Unexpected Money
Put any extra unexpected money into the down payment fund, such as Christmas money, birthday money, graduation money, bonuses, tax returns, etc. It quickly add up before you know it.
5. Build a Side Business
Starting a small business or side job to save money is a great way to supplement your income. Most of us work 40-50 hour weeks, which means that there’s plenty of time to make some extra money on the side. For example, you could sell on eBay or freelance. With the law of compounding interest, every little bit counts.
6. Budget for It
The best way to save for your down payment is to build it into your budget. Start by determining what your monthly house payment will be, then subtract your current mortgage or rent from that number (tip: don’t forget to add homeowner’s insurance and taxes to your expected mortgage payment!). For example, if you expect to spend $2,000 per month on your mortgage and your rent is $1,200, you will save $800 per month. Not only will this help you save for your down payment, but it will solidify your future mortgage payment in your budget. This will help you make sure you can afford your mortgage once you buy your home.
7. Increase Your Income
Looked for ways to increase income. In particular, take on overtime at your full-time job, bump up your rates for freelance work, take on an additional weekend project. Ask for repayment of any loans you’ve made, and create a sense of urgency by reminding a friend or family members that the lack of repaying you is literally taking you out of house and home.
8. Live with a Roommate
Living with roommates for a couple of years instead of getting a place of your own can help you save on the cost of rent, utilities, groceries, etc. until you can get ahead on the down payment you need. It may not be the ideal situation, but could easily allow you to save a few hundred dollars per month.
9. Maximize Earnings on Your Stuff
Perhaps you have a spare room that sits empty. Consider renting that room out, on your terms, through a service like Airbnb or VRBO. Got items sitting around the house that you don’t use and will never use? Sell those items on a site like eBay or have a yard sale. Do you have a vehicle that is just sitting around in your driveway doing nothing? You can rent that vehicle out using a peer-to-peer car sharing service like GetAround.
10. Rent Cheaply to Save Up
Rent for cheap and save up! If the timing is not right in the real estate market, you could look to rent for one year for a bedroom at the in-laws’ house, or with a roommate, and you could save up quickly for the down payment you need.
11. Think Long-Term
The trick is giving up short-term desires (eating out, expensive vacations) for the long-term goal of a home. So hang a picture of your dream house where you’ll see it every day, like the bathroom mirror. Then put aside money in a separate account immediately on payday. Place a Ziploc bag in the center console of your car or a jar in your office to collect loose change. You’ll be surprised how much you’ve saved by the time you cash it in.
12. Out of Sight, Out of Mind
Open an account outside of your normal day-to-day financial institution (free of fees, of course) that you bank with. Reducing visibility and minimizing accessibility to the funds is critical to staying focused on the savings goal. Why do you think traditional piggy banks had to be broken in order to access the money? If they were ‘see through’ and you had easy access to the coins inside, you probably wouldn’t save any money. Same concept here. Out of sight, out of mind!
13. Pay Off Debt to Maximize Savings
If you start making large payments on your current debt, it will be paid off at a faster rate. That additional savings on the debt payment can go toward your down payment.
14. Be Realistic
It’s important to be realistic about what kind of home you can afford. Researching dream homes causes house envy and causes you to be dissatisfied with homes in your budget. Try to stay focused on the opportunities at hand within your designated budget.
15. Live Frugally
Live as frugally as possible. Cut out items that provide for the “latte factor.” You’ll be surprised how much money you can save just by staying in more and eating out less. Buy used whenever you can until you save enough money for your down payment goal. Go over your income and expenses, cut as much as you can. Set aside a set amount to save every month to contribute to your down payment. Though it takes some sacrifice now and a bit of time to save up, it’ll be worth it in the end.
16. Use Your Work Raises and Bonuses
My favorite way to increase how much you’re saving is to do it each time you get a raise (or bonus). Figure out how much the raise increases your paycheck, then set up an automatic contribution to savings in that amount, or half that amount. Do it with the first higher check so you never get used to that higher amount (even a little taste can make it harder to do this later).
17. Use Partners for Investment Properties
For investment properties, use partners and private lenders for your down payments. When you find a good deal, they put up the cash, and you share the profits. It can be a 50:50 split, and other times, you pay them interest.
18. Stay Focused
Be focused. Saving up enough for a down payment is going to take some time. Because of this, you have to stay focused throughout. Always keep in your mind your goal. When you are out shopping, question a purchase as to whether or not you really need it. Don’t give up!
19. Look Beyond the Down Payment
The most expensive part of buying a home is not necessarily the down payment, but the interest rate you will pay over the life of the mortgage. Your interest rate is determined by your credit score, and that can mean the difference between affordability and a cash hemorrhage. It pays to check your credit score early to make sure all is accurate, and allow yourself time to improve in order to qualify for the best rates.
20. Master Your Credit
Finally, treat credit cards as an important tool in your journey to homeownership. It can take a while to figure out how to use it correctly, but building strong credit now helps you get lower interest rates, approval for higher credit limits, and better credit card rewards and insurance rates later. Start learning how to properly manage your credit early on.