How to Save for a Home Down Payment
Saving for a down payment is one of the first steps to buying a house, and most home buyers spend years saving enough money. For those who are renting their home, saving for a first down payment can sound intimidating. Luckily, the following ways can make the process easier and less stressful overall.
Know How Much to Save for a Down Payment
In order to effectively save for a down payment, people should start by determining how much money they will need to save. This information can help them determine how much money they will need to set aside on a weekly, monthly, or quarterly basis.
Explore Loan Products
Different loans require different down payments. Conventional mortgages typically require a 20% down payment, though they may allow for a lower down payment if the home buyer is also willing to pay a mortgage insurance premium.
FHA loans require a 3.5% down payment, and USDA loans and VA loans may require no down payment at all. Home buyers who wish to make a low down payment should clarify with their lender whether they'll have to pay a mortgage insurance premium. This premium can help buyers make their first home purchase, but for people who can afford a higher down payment, the trade off may be worthwhile.
Choose a House Price Range
Home buyers who want to know how much they need to save should also start looking at homes in the area where they want to buy. Which homes are they interested in, and what do those homes cost? Knowing how much the home buyer plans to spend can help them determine how much they will need to save for their down payment.
Set a Down Payment Deadline
Once buyers know exactly how much they need to save, the last piece of information they need is a deadline. For example, if the home buyer has determined they need to save $15,000, and they need to save that amount in 3 years, then they must save $5,000 per year, or approximately $420 each month.
Create a Budget
Once the home buyer knows how much they need to save in a specific time period, they can then create a home budget. Often, home buyers must make financial sacrifices in order to set aside the money required for a down payment. Buyers should:
- Categorize everyday expenses like food, utilities, rent, car payment, etc.
- Determine how much money needs to be spent on each category.
- Look for opportunities to save money in each category.
The money that is left over after it is spent in each category is how much can be saved each month.
Work with a Reputable Lender
Future home buyers who would like to save for their first down payment should call reputable lenders to get a sense of what kind of loan they will qualify for and how much they can expect to pay for their down payment. Establishing this type of information before the buyer makes their home purchase will give them a good resource to turn to when it's time to buy a home.