Many people don’t know how to save money for a down payment. It can seem like an impossible task. But if you do some up-front planning and follow some simple tips to save money, you’ll find your down payment fund building over time.
How to Save Money for a Down Payment: Up-Front Planning
Start by doing some research and making some decisions about the home you will buy.
Estimate How Much You Can Afford
You’ll need to make some decisions about the mortgage you’ll need.
· Do some online research to look at homes and come up with a target home price
· Use online calculators to determine what your monthly payment would be at different down payment levels, and don’t forget to include insurance and property taxes
· Compare the monthly payments to your gross income—lenders usually want to see that you’re paying around 28 percent or less of your gross income on your house
Another good idea is to contact a local professional real estate agent to help. You won’t know exactly how large of a loan you can qualify for until you get pre-approved by a lender. But, your real estate agent can help you establish an estimate.
The other thing to keep in mind is that you’ll also need to save funds to pay for closing costs. Closing costs can range from 2 to 7 percent of the value of the home, and you’ll need to pay your share of those costs. Be sure to add those costs to your down payment amount.
Identify Loan Options
As you’ll see in your research, the more money you put down on a home, the lower the monthly payment will be. The standard minimum for a down payment is 20 percent of the loan amount. So, if you want a $250,000 home, you’d need $50,000 as a down payment. But, not everyone can save that much.
There are a number of alternatives for obtaining a mortgage with less than 20 percent down. If you can get a conventional mortgage, you can find lenders who will accept less than 20 percent down. However, you will need Private Mortgage Insurance (PMI). You’ll pay for that insurance with an extra fee every month, but it does go away after your loan balance is equal to 78 percent of the value of your home.
Other alternatives include government-backed loans such as VA loans, FHA loans, USDA loans, and if you’re a first-time home buyer, Fannie Mae offers a Conventional 97 Loan. Some of these loans require PMI, some of them offer lower than usual interest rates, and some have income restrictions. You’ll need to find out if you can qualify for any of these loans to ease the burden of saving for a down payment.
Consider Down Payment Assistance Programs
If you’re a first-time home buyer, or if you haven’t owned a home in the past three years, you might be eligible for a down payment assistance program. Assistance programs come in the form of grants, loans that are repaid along with your mortgage, loans that only need to be paid off when you move, sell, or refinance, and loans that you don’t need to repay if you keep the home for a predefined number of years.
Once you’ve determined how much of a down payment you need to save and how long you want to give yourself to save that amount, you can start salting money away.
How to Save Money for a Down Payment: Tips for Saving
Once you have your plan for how to save money for a down payment, you actually need to start putting extra money aside. That’s the second half of the challenge, and here are some tips for making it as painless as possible.
1. Automate Your Savings
The easiest way to make sure you save for your down payment is to make it automatic. Open a separate account and set up automatic transfers from your checking account each month.
2. Skip The Restaurants
Whether you are eating fast food or trying out that new restaurant that just opened up around the block, save it for the celebratory moments. Even though eating out is easy, fun and exciting, staying in a few nights a month could save you hundreds of dollars for your down payment.
3. Skip The Coffee Run
If you are addicted to caffeine like most of us, not drinking coffee is just not an option. You can always brew a pot at home or use other natural alternatives like exercising, eating superfoods or even some sun exposure! Saving just $4/day on that latte, will save you almost $1,500 by the end of the year to help with your down payment!
4. Skip/Unsubscribe from Your Favorite Stores’ Newsletter
We all love hearing about special deals and promotions from our favorite brands but unsubscribing from these newsletters can reduce the urge to splurge on these “deals”. Skipping unnecessary offers could save thousands to help with your down payment.
5. Cancel Unnecessary Memberships/Subscriptions
If you think saving a few bucks a month can’t help, just take a look at the all monthly memberships and subscriptions you’ve signed up for. Whether it is the gym, Netflix, that meal-kit delivery or the personalized monthly box of grooming samples it’s best to re-evaluate how often you are actually using these services. Canceling one or two of these will save you thousands by the end of the year to help with your down payment.
6. Create a Budget and Stick To It
If you are trying to create a budget for yourself, it’s best to start small. Start with something attainable and grow from there. When saving for a down payment, starting with small tweaks to your lifestyle can really add up! And remember, you don’t need a 20 percent down payment – there are a lot of programs available with as little as 3 percent down.
Planning to buy a new home is exciting, but there are also challenges you’ll need to face. LemonBrew offers several resources to help you make sure your home buying experience is a good one.
We understand the real estate process can be complicated and that’s why LemonBrew was created. We’re here to help you match with a local real estate agent that is an expert in their field, as well as provide mortgage services to find the right home loan for you! With LemonBrew, you have advisors at your disposal from beginning to end to offer tips and be your advocates during one of the largest transactions of your life.