Home ownership is a goal that many aspire to achieve. The home ownership rate in the United States is 63% and almost 70% in Canada. One of the requirements to owning a home is having a down payment. The larger the down payment ideally, the lower the monthly mortgage payments should be. Securing a sizable down payment can significantly reduce financial stress in the future. Start by managing your finances with Personal Capital or Mint.
It is a good idea to get pre-approved for a loan when you start looking to buy a house. Use LendingTree to get the best rate, since they automatically compare rates from top lenders.
Saving for a down payment on a house can seem like a daunting task, but with careful planning and commitment, it can be achieved. Here are some detailed ways to save money for a down payment on a house:
- Set a Goal: Setting a specific goal is essential for achieving any financial objective. Determine how much you need to save for a down payment on a house and set a timeline for when you want to reach that goal. Having a clear target will help you stay focused and motivated.
- Create a Budget: Creating a budget is a critical step in saving money for a down payment. Take a close look at your income and expenses to identify areas where you can cut back on spending. Look for ways to reduce unnecessary expenses such as dining out, subscription services, and entertainment. Make a plan to allocate a specific amount of money to savings each month.
- Open a Separate Savings Account: Opening a separate savings account for your down payment can help you stay organized and focused on your goal. Choose an account with a high-interest rate to maximize your savings. Consider automating your savings by setting up a direct deposit from your paycheck into your savings account.
- Explore Down Payment Assistance Programs: There are various down payment assistance programs available to first-time homebuyers, low-income families, and veterans. These programs can provide grants, loans, or other financial assistance to help cover the down payment and closing costs. Research and find out if you qualify for any of these programs.
- Consider a Side Hustle: A side hustle can be an excellent way to earn extra money to put towards your down payment. Consider freelancing, selling items online, or taking on a part-time job. Any extra income earned can be put directly into your savings account.
- Reduce Debt: Reducing your debt can free up money to put towards your down payment. Consider paying off high-interest credit card debt first, as this can save you money on interest charges in the long run. Also, avoid taking on new debt while you’re saving for a down payment.
- Stay Motivated: Saving for a down payment can be a long and challenging process, but it’s essential to stay motivated. Keep your goal in mind and celebrate small milestones along the way. Visualize yourself in your new home, and remember that every dollar saved gets you one step closer to achieving your dream.
Here are a few tips for saving up for the down payment:
Pay off high cost debt
High cost debt can significantly reduce one’s ability to save money. Debts with double digit interest rates like credit cards and some car loans can make it difficult to save as more income is used to service the loan. Before starting to save for a down payment it is advisable to get rid of high cost debt. The best approach is to focus all efforts to paying these debts off as quickly as possible. There are two benefits to doing this. The first, is that you will have more money to put towards your down payment after you get rid of these debts. Second, as you lower your total debt outstanding your total debt service ratio will go down as well. The lower your total debt service ratio (TDSR), the less of a credit risk you will be to lenders when applying for a mortgage pre-approval.
Paying off high-cost debt can seem overwhelming, especially if you have multiple sources of debt. However, with careful planning and dedication, you can develop a strategy to eliminate high-cost debt. Here are some steps you can take:
Prioritize Your Debt: List out all of your debts, including the interest rate and minimum payment for each. Prioritize your debts based on the interest rate, starting with the highest interest rate first. This will save you money on interest charges in the long run.
Make a Budget: Create a budget to help you identify areas where you can cut back on spending. By reducing your expenses, you can allocate more money towards paying off your debt. Determine how much money you can put towards paying off your high-cost debt each month.
Consider Consolidating Your Debt: Consider consolidating your high-cost debt into one loan with a lower interest rate. This can make it easier to manage your debt, reduce the amount of interest you pay, and potentially lower your monthly payment. You can consolidate debt by taking out a personal loan, using a balance transfer credit card, or borrowing against your home equity.
Increase Your Income: Consider taking on a side hustle, getting a part-time job, or asking for a raise to increase your income. Any extra income can be used to pay off your high-cost debt faster.
Negotiate with Your Creditors: Contact your creditors and ask if they can offer a lower interest rate or a payment plan that is more manageable for you. Sometimes, creditors are willing to work with you to help you pay off your debt.
Use the Snowball or Avalanche Method: The snowball method involves paying off the smallest debt first and then moving on to the next smallest debt, regardless of interest rate. The avalanche method involves paying off the debt with the highest interest rate first, regardless of the balance. Choose the method that works best for you.
Stay Motivated: Paying off high-cost debt can take time, so it’s essential to stay motivated. Keep your goal in mind and celebrate small milestones along the way. Consider tracking your progress visually to help you stay motivated.
Avoid lifestyle inflation
- Lifestyle inflation is probably one of the biggest silent killers of wealth accumulation. Lifestyle inflation occurs when one increases their spending as their income increases. Fancier vacations, expensive vehicles and rental apartments etc. The quickest way to save money overtime is to keep your standard of living the same (or close to it) as your income increases. If you redirect your raise (as soon as you get one) to your savings account, you can increase your savings rate with little impact to your current life spending.
Lifestyle inflation, also known as lifestyle creep, refers to the tendency to increase spending as income increases. While it can be tempting to indulge in more expensive habits and purchases when you start earning more money, lifestyle inflation can quickly eat into your income and derail your financial goals. Here are some ways to avoid lifestyle inflation:
Set Financial Goals: Setting clear financial goals will help you stay focused on what you want to achieve with your money. Determine what you want to save for, such as retirement or a down payment on a house, and set a specific target. Having a goal in mind will help you resist the urge to spend more money on unnecessary purchases.
Create a Budget: Creating a budget is essential for managing your spending and keeping lifestyle inflation in check. Track your income and expenses, and identify areas where you can cut back. Be realistic and set aside some money for discretionary spending, but don’t exceed your budget.
Avoid Comparing Yourself to Others: Comparing yourself to others who have a higher standard of living can make you feel like you need to keep up with them. However, remember that everyone’s financial situation is different. Focus on your own goals and what’s important to you, rather than trying to keep up with others.
Live Below Your Means: Living below your means means spending less than you earn. This is a crucial habit for avoiding lifestyle inflation. When you receive a raise or promotion, resist the urge to increase your spending. Instead, save the extra money, invest it, or use it to pay off debt.
Delay Gratification: Delaying gratification means waiting to make a purchase until you can afford it. Instead of immediately buying something on credit, save up for it and purchase it with cash. This will help you appreciate the value of what you’re buying and avoid accumulating debt.
Practice Gratitude: Practicing gratitude means being thankful for what you have and focusing on the positive aspects of your life. By appreciating what you have, you’ll be less likely to feel the need to constantly upgrade your lifestyle.
Reevaluate Your Spending Regularly: Regularly reviewing your budget and expenses can help you identify areas where you’re overspending. If you notice that you’re spending too much in one area, such as eating out or shopping, consider reducing your spending in that category.
Save windfall income or use it to pay off debt
- Windfall income can quickly help boost savings or pay off debt. Strive to save at least 50% of windfall income towards a down payment or use it to pay off high cost debt. Either option will help you reach your goal of home ownership faster. Examples of windfall income include tax refunds or financial gifts from family and friends.
Lower rent costs
- Housing costs whether renting or owning make up the largest expense for most households in America at around 30%-50% of take-home pay. If home ownership is a major financial goal for you then lowering your current rental costs as much as possible can help you reach that goal faster. Some ways of doing this include: getting a roommate, temporarily moving to a less expensive part of town, moving back with parents or negotiating with your landlord when renewing your lease.
Claim credits and deductions on your tax return
As much as tax refunds are a great source of windfall income, they are monies that are entitled to you during the calendar year and paid back to you at tax time. By waiting until tax time to get a refund you are giving the government an interest free loan of which they return back to you at a lower purchasing power due to inflation. An effective way to avoid this is to claim all credits and deductions you are entitled to on your W-4 form (United States) or TD1 (Canada). This will result in the government withholding less taxes each paycheck, leaving you with a larger take home pay and more money to go towards your down payment. It is important to mention that claiming credits and deductions is only effective if you plan on redirecting the extra income each paycheck towards your savings account or paying off high cost debt. For some having a slight increase in their take-home pay every paycheck may cause them to spend more than if they received a larger refund at tax time. If this is the case then it may still be beneficial to overpay the government and wait for a larger refund.
Claiming all credits and deductions on your tax return can help you reduce your tax liability and increase your tax refund. Here are some steps to help you claim all credits and deductions on your tax return:
- Gather All Necessary Documents: Gather all necessary documents, including your W-2, 1099s, receipts, and other documentation related to income and expenses.
- Determine Your Filing Status: Determine your filing status. Your filing status will determine your standard deduction and eligibility for certain tax credits.
- Determine Your Eligibility for Credits and Deductions: Determine your eligibility for tax credits and deductions based on your income, expenses, and other qualifying criteria. Common credits and deductions include the Earned Income Tax Credit, Child Tax Credit, American Opportunity Tax Credit, and mortgage interest deduction.
- Use Tax Preparation Software: Consider using tax preparation software, such as TurboTax or H&R Block, to help you claim all credits and deductions. Tax preparation software will guide you through the process and help you identify credits and deductions you may be eligible for.
- Consult with a Tax Professional: If you have a complex tax situation, consider consulting with a tax professional. A tax professional can help you identify all credits and deductions you may be eligible for and ensure that you claim them correctly on your tax return.
- Review Your Tax Return Before Submitting: Before submitting your tax return, review it carefully to ensure that all credits and deductions are included and that there are no errors or discrepancies. Double-check all calculations and make sure that all information is accurate and up-to-date.
Avoid buying a new vehicle
- The average American spends $479/month on car payments over a 7 year period for a new vehicle. That comes up to $40,236. Even if half of this money was saved it would go a long way to a sizable down payment. Vehicles also depreciate over time which means that the money invested in them result in a negative return. An alternative is to save up some cash and buy a used $5k-$10k vehicle and avoid car payments altogether. If you are tight on cash but need a vehicle to get around, finance a used vehicle at lower payments but make sure your total transportation costs do not exceed 10% of your take home pay. This includes car payments, Allstate Auto Insurance, gas, maintenance and repairs. If you live in a larger metropolitan area, look into ride shares or Uber as low cost alternatives.
Get a side hustle
- Even with our best efforts, we may not be earning as much money as we would like from our full time employment. In addition to asking for a raise or switching employers we also have the option to pick up a side hustle that can help increase income. Side hustles are a great way to increase income stability, employment skills and professional network. Even earning an extra $200-$400 a month from a side hustle translates to $2,400- $4,800 a year. Some great side hustle gigs include: tutoring, Uber driver, blogging, selling items on eBay and consulting services. Consider starting a blog or follow our several ways to making money online.
Ditch the perks
- Depending on how quickly you want to save for a down payment cancel memberships and subscriptions that are eating at your savings. Cable, gym membership and expensive cell phone bills can be cancelled and replaced with more cost effective alternatives. Consider getting online streaming service like Netflix or Amazon Prime, find active ways to exercise outside of the gym and lower your phone and data usage.
Reduce or eliminate discretionary spending
- Discretionary spending are those expenses we incur for our wants. Examples include eating out, entertainment, vacations, buying lunch at work instead of packing a lunch etc. The average American spends about $8 a working day eating out. This translates to $176/month or over $2k a year. By eliminating one or two discretionary items from our budget, it is possible to increase savings.
Live on half and save the rest
- This approach works best if you do not have kids or can be extremely frugal or both. If you want to save a large amount of money in a short period of time, save half of your paycheck if you are single or live on one income if you are a couple. If you are financially capable of doing this it is probably the quickest way to save money.
Switch to online banks
- Open a savings account with an online-only bank and enjoy higher interest rates compared to regular banks. Online banks are great for both checking and savings accounts because they have no monthly fees and offer competitive interest rates to store your money.
Automate your savings
- The best way to save money on a consistent basis is to have the money taken out before you can use it. Pay yourself first by automating your savings so that a fixed amount of money is taken out of your paycheck as soon as you get paid.
Buying a home can be a tedious experience, especially if it’s your first time. With many real estate trends, you might get tempted to make a spontaneous purchase that could damage your financial goals and put you in debt.
How to Navigate Home Buying Process
Start saving for a down payment in advance
It is recommended that you put aside a 20% down payment. However, many lenders now allow much less with first time home buyers packages allowing as little as 3% down payments. Putting down less than 20% means that the costs of paying the mortgage insurance will be high, and even a small down payment can be substantial.
Set a budget and calculate a monthly home payment that puts into consideration how much home you can afford, and discuss that with your lender. Additionally, you can use a down payment calculator to help you achieve your goal. The best way to save for a down payment is to set aside tax refunds as well as work bonuses, setting up an automatic savings strategy, and utilizing apps to track your progress.
Get a loan
It is not necessary to get a mortgage loan before purchasing a home; however, it is suitable to get your loan pre-approved prior to buying the house. Many home sellers won’t consider deals when they don’t have a guarantee that the buyer can get a loan. There are many conventional loans that first-time buyers can access.
On the other hand, buying a home can be more expensive than renting. This is because, when you purchase a home, you become responsible for all the upkeep and maintenance costs. These costs can accumulate real fast, therefore make sure that you are debt-free before buying a house, then you can get a backup fund that will cater for three to six months of expenses.
Get the best agents in your area
There is no need to hire an agent if you would prefer to go to an open house and look through various homes online. However, hiring an agent will save you a lot of time because;
- You can preview homes
- An agent usually knows the newest listings forthcoming that you might not be aware of
- An agent can help you know if a house has been overpriced and will advise you accordingly
- An agent will send you a listing that fits your budget and you won’t waste time looking for active listings that are under contract.
Find the right home to purchase
Finding a house to buy has never been an easy task. Buyers, especially first-time buyers, spend a lot of time trying to figure out where they want to live. Once they have carefully selected the community, they quickly move in after two to three home tours. Make sure that the home you choose is within your price range. Your agent will provide valuable market proficiency and can help you find great deals on homes as soon as they are listed.
Pick the right type of house and neighborhood
The phrase “feel at home” usually includes the community too. Look for affordable house and land packages from a community with access to parks as well as playgrounds, an ideal school district and easy access to community roads. Additionally, consider choosing a community with amenities like community centers, pools, and sports fields that are usually found in new home communities.
Mistakes to Avoid When Buying a Home
It is very easy to get swept up in the joy of buying a home and make mistakes that can leave you with buyer’s regrets afterwards. Knowledge is power, and knowing what issues to avoid as a first time home buyer is essential. The following are mistakes you should avoid when shopping for and buying a home:
- Speaking to just one lender
- Being fast in making decisions
- Looking for a home before applying for a mortgage
- Draining your savings
- Making decisions grounded on feelings
- Not negotiating for discount and offers
- Not planning for closing costs
- Not knowing the limit of a home inspection
- Buying inadequate home insurance
- Assuming you only need 20 percent down payment
Bottom Line
Buying a home is a dream come true for most people. Therefore you shouldn’t risk messing up everything. Many people buy a house to get that pride of proprietorship. This means you can paint the walls any color you want. Additionally, home ownership also gives you and your family a feeling of stability and security. However, to be on the safer side, you need to have mortgage protection that can protect you from the financial distress that comes with unforeseen loss.