Housing affordability is becoming more difficult these days, but it doesn’t mean that it isn’t totally impossible for some families. One key step in homeownership is an adequate down payment on your new home. It will take some sacrifices, additional income and possibly assistance from relatives financially. In the end, all the hard work will be worth it when you close on your new home. Here is how to save for a down payment on a house.
Know The Different Home Loans
It’s a good idea to know the different home loans that exist and the requirements for each of them. Most mortgages are conventional loans and you can put a down payment of at least 3% on a home with this loan. Another affordable mortgage is the FHA loan. These loans are backed by the Federal Housing Administration and you can put down 3.5% or higher on a home with this loan. If you live in a rural area, consider an USDA home loan because these loans don’t require a down payment. Veterans can take advantantage of VA loans and they also don’t require a down payment.
Automate Your Savings
Automate a portion of your paycheck every pay period to an online high-yield savings account such a as Ally or SoFi. You should choose a high-yield savings account because these accounts offer higher interest rates on your savings than traditional bank savings accounts at brick-and-mortar branches.
Open a Certificate of Deposit
You should also save for closing costs and not just the down payment. This is why it’s a good idea to open one or two certificates of deposit to cover additional homebuying expenses. CDs are at fixed rates, and this means you’ll receive the same rate while your CD accumulates interest. When you open a CD and deposit the money, you’ll need to keep it in the account until it matures at the end of the term or you’ll have to pay a penalty.
Look Into Down Payment Assistance Programs
If you’re struggling to save for a down payment, look into down payment assistance programs. These are grants and loans that generally benefit first-time homebuyers and some programs come with minor restrictions. Local nonprofit organizations, private foundations, and government agencies such as HUD often offer down payment assistance programs.
One type of down payment assistance is a forgivable home loan. These loans carry a 0% interest rate and you won’t have to repay this loan as long as you live in the home after a certain number of years. Requirements for down payment assistance programs vary, but generally you’ll need to live in the city you’ll receive assistance from, and you’ll need to take classes on homeownership.
Increase Your Income
If your current salary isn’t enough to save for a down payment, it’s time to increase your income. Meet with your employer to discuss a raise or promotion to a better-paying position within the company. Volunteer to take on extra projects to learn new skills that will qualify you for better positions. Sell items you don’t need and put your earnings toward your savings. Start an inexpensive and profitable side hustle. Other ideas are:
- Renting out part of your house
- Freelance work
- Getting a second job at a retail establishment or restaurant
- Use some of your dividend income
- Babysit neighbors’ kids
- Walk dogs through apps such as Rover
Don’t Waste That Tax Refund!
If you receive tax refunds every year, don’t shop for useless things with them. Be wise with your tax refunds and put them toward your down payment savings. This speeds up the savings process and you may reach your goals faster.
Avoid Major Purchases for Now
If you want to know how to save money for a down payment on a house effectively, avoid major purchases such a as a pricey car and high-end appliances. Don’t charge these on your credit card if you’re buying a house soon. This is because lenders look at your debt-to-income ratio and if you have excess debt, it makes you look risky.
Don’t Forget About Moving Expenses
When you close on the home, there are moving expenses you’ll need to budget for. When you save for a house, include moving expenses. These include:
- Moving trucks
- Packing supplies
- Storage costs
- Transferring and setting up new utilities
- Temporary housing if you’re relocating to new city
Adopt a Barebones Budget
For the serious savers, a barebones budget may work for you. The categories for this budget are housing, food, clothing, utilities, transportation, savings, and debt payments. You would exclude unnecessary expenses such a as spa treatments, dining out, vacations, and concerts.
Consider Debt Consolidation
If you want to streamline your debt payments, consider debt consolidation. Debt consolidation is when you take multiple loans and roll them into one low-interest loan that you’ll pay each month.
Live With Your Parents Longer
Rent payments have skyrocketed in recent years, and as long as you pay high rent prices, it will be difficult to save for a home. Make it less stressful by living with your parents longer while you save for a down payment. Talk to your parents about your goals and stick to them.
Be Realistic About Where You Can Live
Think about your budget while you save for a down payment. The neighborhood you love may be too pricey for you, and you’ll need to adjust your expectations so you won’t buy more home than you can afford. Visit websites such as Realtor and Zillow to get an idea of how much homes in certain areas cost on average. Talk with a knowledgeable realtor who can help you choose an affordable home in a safe neighborhood that suits your needs.
What About Rent-to-Own Homes?
Rent-to-own agreements are like a down payment and here is how it works. You rent the home with the option of buying it when your lease ends. All rent payments will go toward the purchase of the home from the current owner. The drawback of this agreement is that the monthly costs are higher. Before you enter the agreement, a purchase price is agreed upon and you pay an option fee upfront. All of these funds go to an escrow account until you’re ready to buy the home.
Saving for a down payment won’t be easy at times and you’ll get discouraged during setbacks. However, when you use these strategies consistently, you will have the down payment you need to assist with buying your first home.
