So you’ve been thinking about buying a home? You may have already played around with an online mortgage calculator or have a general idea of how much house you can afford. Now, how the heck are you going to save up for that downpayment as quickly as possible? It just takes a little bit of planning and a lot of discipline, but it is completely doable.
Step 1: Create a Plan
Based on your housing budget, figure out exactly how much you need to save. Typically, unless you are able to enroll in a special financing program, a lender will want a minimum of 3% down of the sale price of the home for a conventional loan. Keep in mind that the higher the down payment the lower your monthly payments will be and the less interest you will pay over the life of your line. Most lenders will typically add mortgage insurance to any conventional or FHA loan that has lower than a 20% down payment which will further increase your monthly payment.
Decide what your target percentage is and work backward from there. How much more do you need to save? How aggressive can you be at putting money away towards that savings goal? Let’s say you want to put 20% down on a roughly $300,000 home, that means you need to save $60,000 for a downpayment. Now, let's talk about HOW you can get there.
Step 2: Pay Down or Eliminate High-Interest Debt
If you have credit card debt, it’s time for it to go. Not only are you probably paying pretty high-interest rates to carry that debt month to month, but paying down your debts will actually help you get a lower interest rate when you apply for a mortgage. Pay off the highest interest rate debts first or explore transferring the debt to a zero percent interest rate promotional offer. Many of these offers will allow for zero percent interest for a period of up to 12 months, making it a bit easier to pay down the debt faster. However, just make sure you check to ensure there are no (or really low) annual or transfer fees associated with the account AND that you’re certain you can get the debt paid off within the promotional period.
Step 3: Audit Your Finances
The next step is to figure out exactly where your money is going. If you don’t regularly track your spending, this can be a bit eye opening. Is your money going where you want it to go? Are you spending in places you didn’t expect? Consider where you might be able to make spending cuts or small sacrifices to save more money even faster. The more ruthless you can be at identifying potential leaks in your finances, the faster you can get into that house.
Step 4: Tighten Up Your Spending
Now that you know exactly where that money is going, consider what you can temporarily or permanently do without. You’ll be amazing how much money you find when you pay attention to your spending. Some examples might include
Canceling Subscriptions - How many services or products do you have a subscription for? Of those, how many do you actually use? There are several apps out there that can track auto-renew subscriptions and give you alerts to ensure you are aware of any expense that 7-steps-to-save-for-a-downpayment-asapis hitting your accounts monthly. Eliminating most of all of these can potentially put hundreds of dollars back in your pocket each month…savings that can go directly into your new home – Average savings $50 per month
Reduce Eating Out and Take-Out – Eating out is much more expensive than preparing a homemade meal. Think of it this way, if go out to eat for lunch every day at work and spend only $10 a day, 5 days per week, that is over $200 a month in expenses that can easily be cut. Pack a lunch or meal plan so that you don’t have to wonder what is for dinner. Save eating out only for special occasions. – Average Savings $250 per month
Eliminate that Fancy Coffee Habit – I get it, I love Starbucks as much as the next girl but if this is a daily habit of yours, it could be costing you big time. Buy a good to-go mug and brew your own quality coffee at home for a fraction of the price and put that money to better use towards your new home. – Average Savings $100 per month
Cut Your Grocery Bill – If you go to the grocery store multiple times per week or shop at a higher-priced grocer, you may be able to save some serious cash. Doing things like creating a meal plan for the week allows you to know exactly what to buy and minimizes food waste and impulse purchases. Multiple weekly trips to the store also increase the likelihood that you’ll spend more money so buying all your food at once can result in some big savings too. – Average Savings $160 per month
Trim Your Clothing Budget – Shopping trips can be fun but they can also set you back on your savings goal. Consider minimizing clothing expenses while saving for your downpayment to speed up the process – Average Savings $100 per month
Reduce Monthly Bills – Take a look at your regular monthly bills like cable, internet and cell phone expenses. Try to negotiate a lower rate for those services, or downgrade if you don’t need as much as you have. Again, these monthly expenses add up and can result in huge savings over the course of a few months or year - Average Savings $60 per month
If you were able to make all of these changes that would save you $720 every month or $9,240 in a single year!
Step 5: Get a Side Hustle
If you’re on a time crunch, a second job or side hustle can be a great way to boost your savings even faster. When considering exactly what to do, think about options that compliment your current profession or those that appeal specifically to your interests. After all, if you’re going to take up what free time you have with a second job, you want to at least enjoy it.
Step 6: Press Pause on Retirement Savings
If you’re already saving for retirement, consider temporarily re-directing those savings to your downpayment. If you are currently investing $500 a month into your retirement account, that can give you an extra $6,000 a year towards a new home. Just make sure you go back to your regular retirement savings plan after you purchase that dream home!
Side Note: While tempting, it is generally NOT a good idea to borrow from or cash out your retirement accounts. You’ll typically get hit with significant taxes and early withdrawal penalties and also damage the long-term growth of your savings account. This mistake can cost you more than the money you take out, it can cost you hundreds of thousands of dollars over the long haul and so it’s usually not worth it.
Step 7: Stash Away Unexpected Money
Did you receive a bonus or stimulus check you weren’t expecting? Instead of spending it, stash it in your savings account right away. Similarly, if you get a raise at work, continue to live off of your previous income and put the extra away in savings. Paid off your credit card debt? Continue to put the money you were allocating to the payments away but divert it to your savings. This ‘found’ money can also make a big impact without lifestyle sacrifices of cutting elsewhere.
With these 7 steps, you are well on your way to homeownership. As you get closer to your savings goal, it is a good idea to start talking to and interviewing real estate agents. You want to be sure you can find someone to represent you that will help you maximize the money you worked so hard to save. Want to know how to stretch that housing budget even further? Check out these strategies to maximize your budget when purchasing a home.