Getting Over the Biggest Hurdle: How to Save for a Down Payment
Home prices have continuously increased in most markets. Surprisingly, the national median price has seen a decrease this year. Zillow and Business Insider reported the average home price in the U.S. is around $227,000. Home prices vary from state to state and even within neighborhoods. California, being in the top 3 for the highest prices is at a $560,000+ average, which can get you a Condo in some areas. South Carolina, on the other hand, being on the lower end averages around $166,000 which can get you a 3-bedroom house.
Regardless of where you plan on buying, one of the biggest deciding factors is if you have enough saved for the down payment. For first-time buyers, a down payment causes the most delay in making that initial step. If a buyer plans to put down between 10 and 20 percent, they can be spending anywhere between $23,000 – $53,000 for an averaged price home, which is a large lump sum to have at hand for most people. In more expensive states, like California, buyers could be forking out over $106,000 for the same 10 to 20 percent down.
How can saving for a down payment, plus the additional costs of a home, be more feasible? It doesn’t have to be as big a burden as it’s made out to be. Rather, see it as an action plan with set goals and a timeframe. Below are some helpful tips to help plan ahead and start making achievable progress right now.
How much do I actually need to save?
Before you begin, take a close look at your overall financial picture. This means gathering your monthly income, expenses, and tax information, along with any additional living costs. Be as specific and clear as possible. Then find a mortgage lender to help figure out what you can afford and how much you can qualify for with a loan. Often, new buyers tend to exceed their limits. If this is your first home, go for only what you need in space and size so you can have savings leftover. This will help you build equity for investing in a bigger home in the future. Get realistic about how much you’ll be able to afford upfront and then allocate some extra savings for monthly mortgage payments, fees, closing costs, etc. This will give you peace of mind once you’ve made your purchase and you won’t be stretched too thin.
Start Small and Work Your Way Up
First-time buyers should aim to spend no more than 30 percent of their monthly income towards home expenses. For example, if you make $5,000 a month, multiply that by 0.3 to equal $1,500. That is the max price you can afford towards a home. Find that specific amount for you and any spouses or partners and start putting as much as you can aside. Start with smaller amounts for the first few weeks. When you feel comfortable, start increasing the amount each time you save. This will help you feel more at ease as you take reasonable steps towards your goal.
Create a New Spending Budget
Creating and sticking to a budget is an efficient way to help save more easily. Setting a new, specific budget and being more modest in spending can help you build an active savings plan. Once all your necessary expenses are paid, how much money is left over each month? What are your spending patterns or habits? The National Association for Realtors trend report saw that half or more of younger buyers, 54 percent of those ages 28 or younger, and 50 percent who are ages 28-38, were sacrificing more to save for a down payment. Some were even taking on second jobs to help increase their income and savings account. Is there room to bring in additional income? Can you cut back on eating out, or on auto-subscription services, or pricey fitness memberships? Try to cook more often or try an at-home workout program instead. Find where you can compromise. None of this has to be permanent, but finding areas to make small sacrifices now can help that savings account grow and get you a new home quicker. It may be a challenge at first, but it’s worth the effort!
Open a New Savings Account
Dedicate a separate savings account that is only for your down payment. Set up automatic transfers to send a specific percentage out of your paycheck each time it arrives. This way you’ll be actively saving without even thinking about it. Bonus: think of any additional income – tax returns, gifts, bonuses/commissions, earnings from personal sales, refunds, etc. – as automatic gain into your savings. Instead of spending it, immediately put it into your savings account. Whenever you take a look at your account, that number will be bigger making you feel more confident towards meeting your goal.
Use Cash Over Credit Cards
Once you set your new budget, take out cash for each week or bi-weekly, and only spend what you have. By using cash, you’ll be less likely to overspend, and you won’t be racking up more credit card bills. Try it for a month and you’ll see that your bank account will have more money to put towards savings.
Use Down Payment Assistance Programs
Over the years more assistance programs have been created to help more buyers enter the market. Many young buyers who are still paying off student loans have been among those seeking out additional assistance when saving for a down payment. These programs can usually be found through the state or with local housing authorities. They can also be processed with a lender. Some states offer grants or even tens of thousands of dollars to help. Income, credit score, and location will all be taken into consideration for how much you can receive. It all depends on your situation. Talk with a mortgage lender to find the best options that make sense for you.
Consider Other Loan Options
There’s a wide misconception that 20 percent is the required amount for a down payment. This is not completely true. Putting more down upfront is ideal, but mortgage professionals can help you navigate all your options. The 20 percent down will help keep rates and monthly payments down, but if that’s not doable for you, get estimates on what you can afford. For instance, programs such as the Federal Housing Administration, VA Loan, or the Department of Agriculture can allow for as little as 0-3 percent down. This can save you tens of thousands of dollars, making it possible for more consumers to become homeowners. Keep in mind that not everyone qualifies for the same type of mortgage. These specific loans may require private mortgage insurance or PMI, to be purchased or have other requirements necessary. Talk with a professional ahead of time before applying for these low down mortgage programs.
Work with a Mortgage Professional
It’s best to know that you are not alone in this process. Working with a mortgage professional will help you get a clearer idea of what you can afford and where to begin. If you’re not sure how to find a good mortgage lender, ask for referrals from friends, or have your real estate agent suggest ones they work with on a regular basis.
These are just a few tips that can help you start saving sooner and get you closer to owning a home. My team and I have tons of resources and tips and would love to talk with you! Give us a call and let’s discuss your real estate and financial goals and how we can set you up for success!
This article is intended to be accurate, but the information is not guaranteed. Please reach out to us directly if you have any specific real estate or mortgage questions or would like help from a local professional. The article was written by Sparkling Marketing, Inc. with information from resources like NAR, USNews, and Realtor Magazine.