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Perhaps the biggest obstacle to homeownership, particularly for new home buyers, is having to save for a downpayment. The high cost of living, combined with tighter salaries, is making it difficult for many would-be first-time homebuyers to save up enough for a down payment.
If you are a veteran, and you have VA eligibility, you can get 100% financing on the mortgage. That will eliminate the need for a down payment entirely. If you apply for an FHA mortgage, you will need a minimum down payment equal to 3.5% of the purchase price of the home. And conventional mortgages require a down payment of between 3% and 5% of the purchase price.
If you are purchasing a home for, say, $200,000, a down payment requirement of between 3% and 5% will require you to come up with between $6,000 and $10,000.
How can you save for a downpayment? Here are five strategies that will help you do just that.
1. Start a Payroll Savings Plan to Save for a Downpayment
If you’ve never saved money before, it can seem as if you have to climb a high wall. But actually, it’s really not that difficult. Saving money is really more of a mechanical process than anything else. And once you get it going, it just takes care of itself.
The best way to do that is by setting up a payroll savings plan. Just as you contribute some of your pay to your retirement plan on a regular basis, you can do the same thing with a savings account. If you can allocate $100 out of each paycheck into a savings account, and you are paid every two weeks, that will enable you to save $2,600 in one year.
If you’re married, and your spouse also saves $100 per paycheck, that will double your savings to $5,200 after one year.
That may not be all of the money that you need for your down payment, but it will certainly get you closer. And what you will likely find is that once the payroll savings process gets going, you won’t even notice that it’s happening.
2. Sell Everything You Can!
Most of us have more stuff in our homes than we know what to do with or ever use. You can raise some quick cash by selling as much of it as you can. You’ll probably be surprised at how much of your “junk” others are willing to pay you for.
Empty out your closets, your basement, your garage, and any storage corners that you have in your home, and pull out everything. If there’s anything that you find that has a remote chance of being sold, plan to get it sold.
You can sell the items at a garage sale, a flea market, or online through sites like eBay, Amazon.com, and Craigslist. For better merchandise, you might even consider selling it through a consignment shop.
However you manage to sell your stuff, make sure that the cash that you receive for it goes right into your down payment savings account. If you’re saving money for a down payment, you have to make sure that you don’t spend it for other purposes.
3. Bank Your Income Tax Refund – and Any Other Cash Windfalls You Get
Though you may not think about this too often, every one of us gets cash windfalls from time to time. If you are looking to save money for a down payment on a home, those cash windfalls are an excellent way to fast-forward the process.
Banking your income tax refund is one obvious windfall. According to the IRS, the average tax refund for the 2016 tax year is $2,763. If you normally get a refund for anything close to that amount, that can be the foundation of your down payment savings account. And don’t forget to factor in your state income tax refund – that can add a few hundred dollars more to the account.
But don’t stop there. If you receive a bonus at work, or even a large commission check, plan to add those to your down payment account as well. Also, if you have any stock in individual companies or US savings bonds, consider selling them or cashing them in to add to your savings. Yet another excellent source of down payment money is wedding gifts.
4. Cut Your Living Expenses Temporarily and Radically
It may be possible that your budget is stretched so tightly that there’s no room for saving money for a payroll savings plan or any other savings strategy. If that’s the case, you may have to carve out some space in your budget.
The best – and only – way to do that is by cutting out expenses. Review your entire budget, and identify expenses that you can live without, at least for a year or so. For example, if you can eliminate cable TV, you might save around $80 per month. That will be $1,000 in a year. If you have a landline telephone you’re paying for, now would be an excellent time to finally cut the cord.
Another very rich source of expense cutting for a lot of people is going out to dinner. It cost about $50 for two people to have dinner in a moderately priced restaurant these days. If you eat out twice a week, cut that down to once. Saving $50 per week over 52 weeks will enable you to save $2,600.
Review all of your expenses; though they may seem small, when applied over weeks or months, they can really add up.
5. Get a Gift From a Family Member
If all else fails, try getting a gift from a family member. Getting a gift from a family member is a common source of down payment money. This is especially true for first-time homebuyers.
Many times, parents are even anxious to help out. That’s because they want to see their adult children get into a home, and particularly to provide a home for any expected grandchildren. They may be more open to the idea of giving a gift than you’ve ever assumed.
Most likely, you’ll have to use a combination of two or more of the strategies to reach your down payment goal. But the sooner you put the strategies to work, the faster you’ll accumulate the money that you need for the down payment, and the sooner you’ll be in your new home.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
