If you’re ready to become a homeowner, you might be unsure about how to save a large chunk of change for the down payment. Since home lenders generally won’t finance 100% of the purchase price, having cash in the bank is a key part of getting approved for a home loan.
Keep reading for seven tips to save your house down payment as quickly as possible.
1. Research first-time home buyer programs.
There are many great programs for first-time homebuyers that may include down payment assistance or mortgage interest subsidies. Many homebuyer programs define a first-timer as someone who hasn’t owned real estate in the past three years. Be sure to ask a potential mortgage lender how these programs could save you money, no matter your age or even if you owned a home in the past.
The U.S. Department of Housing and Urban Development and one of its agencies, the Federal Housing Administration, have helped more than 30 million people become homeowners since 1934. These agencies don’t make loans, but they insure loans. This encourages lenders to give mortgages to hopeful home buyers who might not qualify otherwise.
With an FHA loan, you don’t need a high down payment or excellent credit to qualify. Ask your lender for details about FHA programs for first-time buyers. Or contact a HUD housing counselor for free or low-cost advice.
2. Create a spending plan.
A spending plan is a strategy for how to spend money before you ever receive it. It takes into account all your living expenses, bills and money you want to save for financial goals, such as buying a home.
Track your income and expenses in an old-school paper notebook, enter it in a computer spreadsheet, or import it into financial software. Use any system that’s convenient so you’ll stick with it month after month. Most financial programs have a budgeting function that allows you to enter preset spending limits, organize transactions into categories and compare your ideal budget to your actual spending.
If you’re not funding your goals, it’s time to make some serious changes and decide where you can cut back. Your job is to look for expenses you can reduce or eliminate and put that money toward your down payment.
3. Avoid consumer debt.
Having expensive consumer debt — credit cards, payday loans — can make it difficult to save for a down payment. Make it a priority to pay down any debts with double-digit interest rates.
When you’ve eliminated the balance, use the savings to pay off your next most expensive debt or save it for your future home.
4. Sell unused items.
If your closets are overflowing, or the thought of trying to find something in your storage unit is frightening, it’s probably time for a yard sale.
Maybe you have an extra vehicle, sporting equipment, jewelry, or collectibles you could sell to raise down payment money. Take a hard look at unused items that could be sold at online sites such as eBay or CraigsList.
5. Use cash windfalls.
If you receive any unexpected money, such as a cash gift, tax refund or a bonus or raise at work, make sure you earmark it for your most pressing financial needs. Depending on your situation, that might be shoring up your emergency fund, paying down high-interest debt, or saving for a down payment on a home.
6. Be cautious about tapping retirement funds.
Owning a home of your own can be a very smart investment, especially with today’s low interest rates. Just make sure you tap any type of retirement fund with caution because depleting it means you’re giving up the opportunity to build wealth. It’s a good idea to consult with a financial adviser so you carefully weigh the pros and cons of such an important decision.
While taking a loan or withdrawal from a retirement account may make sense for some home buyers, the best scenario is to have plenty of savings, so you don’t need to touch your retirement nest egg in the first place.
7. Keep your down payment safe.
Once you begin saving money for a house down payment, you might be tempted to invest it with the hope of turbocharging its growth. But financial markets are volatile in the short term, which means you could lose all or a significant portion of your money right before you need it. Instead of exposing your down payment to any amount of risk, keep it safe in a high-yield, FDIC-insured savings account.
You or your employer can set up an automatic direct deposit into your savings. Then commit to never use these funds for anything other than your down payment. That ensures your money will be there when you find your dream home.