Life is full of milestone events: graduating high school, starting your first full-time job, your wedding day. In our minds, one that’s surely at the top of the list is closing day on your first home.
For most people, buying a home is the largest financial investment they will ever make. And it’s one that they have worked hard at—often for years—to accomplish. The bulk of that hard work comes in saving for the down payment.
If you’re on the path to homeownership, but unsure how to take your first steps, we can help. Here are five useful budgeting tips that will actually help you save for your down payment.
Determine Your Down Payment Amount and Timeline
The first step to saving for a down payment is to understand how much you need to save and how long you have to do it. According to Fannie Mae, 40% of Americans don’t know the minimum down payment required to purchase a home. The good news is that it’s less than you probably think. The median minimum down payment lenders require for a mortgage is 3%. Of course, if you’re able to pay more up front, that will benefit you in the long run. But especially if you’re on a tight deadline, it’s good to check with your lender, get pre-approved for a loan, and ask how much of a down payment is required for those terms.
Once you have an estimated dollar amount, simply divide it by the number of months you have before you’d like to buy. The final number is the amount you should be saving each month.
Create a Realistic Budget and Savings Plan
Next comes the actual “saving” part of the process. It’s realistic to set aside 5% of your pay every month towards a down payment. It’s less realistic to set aside 50%.
When saving money, it’s important to understand where your money goes—not only the money you’re putting into savings, but everything in your budget. Review all your sources of income, and sit down to look at all of your recent expenditures. (Say, from the last six months.) If your pay fluctuates, start with a baseline or average, and build your budget from there. In conjunction with the tips below, you should be able to build a better budget to help you maximize your savings.
Once you have a savings plan outlined, funnel the funds into its own savings account. By keeping the funds separate, it helps you resist the urge to tap into them. If you can, set up recurring deposits—that way you can “set it and forget it” while your savings builds up on its own.
Find Easy Ways to Reduce Your Monthly Expenses
In our opinion, it’s a bit brash to suggest that giving up your regular lattes will help you literally save $20,000 in no time, as some across the internet have implied. However, there are always spots in a budget where you can pare back—at least in the meantime—in order to boost your savings potential.
Are there streaming services you don’t use anymore? Can you skip one lunch out a week if it means being able to meet your savings goal? Are there regular monthly expenses you could be saving on? It could literally pay to shop around for a new car insurance provider or cell phone plan. Sometimes, deals or promotions can help you reduce your expenses by several hundred dollars. But even a 5% savings will help you tiptoe closer to your down payment goals.
Consider Other Sources for Your Down Payment
There are two main ways to lower the amount of money you need to pull from your current budget for your down payment. First, supplement your savings with additional income. This could include asking for a raise at your current job. Or asking for cash this Christmas instead of other gifts from your family. You could pick up a side hustle, such as pet sitting for coworkers or freelance work. There are even companies, like Testbirds or UserTesting, that pay for consumers to test out apps and websites.
The other way to reduce your down payment is to explore other mortgage options. In our region, there are local loan programs through Mountain Housing Opportunities, and federal programs through HUD and USDA that offer low or zero down payment loan options. Each of these programs have loan criteria that differs from conventional mortgage options. For a borrower needing a low-to-zero down payment option, they offer approachable avenues to home ownership.
Review Your Savings Plan—But Not Too Often!
Lastly, keep an eye on your savings plan to stay on track. It’s unnecessary to check it every day, or even every week. But we recommend making a monthly review of your expenses and savings. If you splurged a little too much during this month’s beach vacation, plan to cut back on your discretionary spending next month. If you’re chronically running behind on what you “should” be saving, take a few minutes to reassess your savings plan. Perhaps your initial goal was just a tad out of reach and you’d be more successful reaching a more realistic goal.
And don’t forget to celebrate your milestones! It’s challenging to stick to a long-term savings plan. Break your savings down into smaller goals—perhaps at every $1,000 mark or each time you reach the next 10%. When you hit the goal, reward yourself with a treat. You deserve it!
Ready to Buy a Home? We can Help!
At Beverly-Hanks Mortgage Services, we strive to make financing real estate easy and enjoyable. That is why we are staffed with local financing professionals dedicated to prompt, personal service. We offer a broad menu of financing options, very competitive rates, and customer service that is second to none.
Find out exactly what you need to get a mortgage. Make a mortgage inquiry today!