Have you ever wanted to buy a house? If you answered yes, then you’re not alone. The numbers provided by Pew Research revealed that house buying is at an all-time high.
Seeing the figures, you might be asking this question: “How can thousands of people afford to buy a home?”.
We’ll go out on a limb and say that most of these people probably didn’t buy their houses for the full amount. Surely, with the average prices of homes today, you’d have to be the CEO of a Fortune 500 company to do that.
Instead, these new homeowners likely decided to finance and they’ve recently just started making payments.
Let’s face it, even a downpayment on a modest-sized home can still break the bank. It is still something you’ll have to set aside some money for. Fail to do this, and you can kiss your dreams of homeownership goodbye.
Don’t fret! We at 121 Financial Credit Union have got you covered! In this article, we’ll go over some practical tips you can implement.
By the end of this article, you’ll know more about how to save money for a downpayment on a house.
Interested? Keep reading!
determine any outstanding debts
Most people would think that saving is the first step when it comes to buying and making the down payment for a house. However, this is slightly inaccurate.
The first step is taking stock of any encumbered financial resources. In other words, you’ll have to determine any outstanding debts you’ll have to pay off.
Now, you might be wondering what this has to do with saving money for a home downpayment. In reality, taking stock of debts is very important.
You can’t reasonably proceed to make a downpayment in the presence of debt. It just isn’t practical.
Whatever way you look at it, a downpayment on a home represents a significant financial investment. Even if you’re able to make the payment, having debt just divides your available resources. This will make everything more difficult.
The financial burden will likely be so great that you’ll question what you were thinking when you bought the house. The best thing to do would be to take stock of your debt and pay them off as much as possible.
How Much is a Downpayment on a Home?
You’ve determined that you’re debt-free and ready to buy a home. If you’re going to make a downpayment in the future, you’ll have to save.
Everyone acknowledges this. The more important question to ask is how much money is needed.
The exact amount of money for a downpayment will depend on several factors like the price of the house. Hence, the amount depends on the house that tickled your fancy when you were out house-hunting.
Since the exact prices can vary in 2021, a good baseline is to expect the downpayment to equal a certain percentage of the total price. According to the Consumer Financial Protection Bureau, 20% is the safest percentage.
“Why 20%?”, you ask?
This is because if you’re buying a home, you’ll be speaking to a bank about the downpayment. The downpayment kick starts your mortgage.
As of 2020, the Consumer Financial Protection Bureau observed one thing. It showed that few banks will grant a mortgage to anyone who can’t meet the 20% requirement.
To know how much you’ll have to set aside, know the price of your prospective house. Once you’ve done that, take at least 20% of the house price, and make that your savings goal.
Are There Other Expenses Beyond the Down Payment?
You might be thinking that you’re home-free (figuratively) once you’ve amassed 20% of your ideal house’s costs. However, there are other expenses you’ll need to factor in.
Other than the down payment, you’ll need to pay for closing costs. Closing costs are the costs you’ll incur for the home purchase to go through.
Closing costs include the following, according to Business Insider:
- Property taxes
- Insurance (homeowners)
- Inspections
- Realtor fees (if you bought the house through a realtor)
- Other costs for the transaction
Closing costs can amount to as much as $6,000. It may be higher or lower depending on your mortgage plan and the bank you’re transacting with.
The bottom line is that you need to put aside money for more than the down payment. This is why saving becomes all the more important.
Now that we’ve taken care of the basics, let’s dive into some practical tips for saving money for a home down payment. Let’s begin with one that you might want to consider when you’re strapped for cash — a Federal loan.
Tip 1: Consider Government Housing Loans
We’ve already established that banks will not just hand you a mortgage or home loan. This is especially true if you can’t pony up at least 20% of the house’s value.
Luckily, the Federal government has made life just a bit easier for prospective homeowners. The economic aftershock caused by the COVID-19 pandemic has led to several economic measures.
One of these is more flexibility when it comes to home loans. The Federal government has put in place new loans you can take out for a downpayment on a home.
However, there’s a catch — like any Federal loan, home loans have several requirements. When it comes to Federal housing loans, you’ll need to:
- Have good credit scores (at least 580 points)
- Buy property from certain locations like rural areas
- Belong to the armed forces or be a veteran
Meeting the credit score requirement can make you eligible for a federal loan even if you cannot pay the 20% down payment. In fact, having a score of 500 can already slash the down payment requirement by half, according to Business Insider.
Meet the 580-point requirement, and you might only need to pay 5% upfront. Some loans like the Veterans Affairs loan won’t even require any down payment.
Tip 2: Shop Around for Houses
You’re about to commit to saving for a down payment on a house. As mentioned earlier, you need to know the price of the house and calculate a percentage of that as the down payment.
No two houses are the same in price. You’ll need to do your homework. Luckily, searching for houses you can afford doesn’t always require a drive or a physical visit.
Nowadays, there are online listings where you can view and compare the prices of houses and properties. Examples of online listings are:
- Zillow
- Trulia
- Realtor.com
- RedFin
The list comprises only the tip of the iceberg. Even a quick Google search can yield results of different properties for sale in your area.
Your town or city is always a good place to start your house search. However, if you’re looking to make a down payment quickly, you might want to consider other places.
This brings us conveniently to our next tip on how to save money for a downpayment on a house.
Tip 3: Try Houses Located in Rural Areas
The United States federal government has always had a problem populating rural parts of the country. To make living in rural areas more attractive, the government has put up certain programs to help people move.
One of these programs is the housing loan offered by the United States Department of Agriculture. The USDA Mortgage is open to middle-income and low-income earners who are looking to buy property in a rural area.
If you are looking to buy property in a suburban area, you can also do so under the USDA mortgage. All you need to do is prove your eligibility.
Here’s the best part:
If you’re eligible for the USDA mortgage, you don’t need to make a down payment. Also, the loan comes with many perks and advantages like:
- Low insurance costs
- Low-interest rates
- Flexibility
Tip 4: Boost Your Savings and Downsize
Downsizing is a practical way to trim the fat off your spending. Downsizing doesn’t always mean reducing the number of things you own by giving them to charity.
If you deem some of your possessions as unnecessary, try to sell them. Holding a garage sale can be one of the most lucrative ways to get rid of excess stuff.
Downsizing means more than reducing your possessions to the bare necessities. You might also have to take a look at expenses you can probably do without.
Right away, you’ll have to eliminate certain home expenses like:
- Your gasoline bill
- Your electric bill
- Air conditioning
- Heating
- Cable
- High-speed internet
While you don’t need to reduce your living conditions to that of a cave, try to seek cheaper options. Wherever and whenever possible, eliminate.
By doing this, you’ll be maintaining your living conditions as well as save more for a down payment for your new home.
Tip 5: Take the Money You’ve Saved and Put It Somewhere It Can Grow
You can only scrimp and save for so long. At some point, you’ll need to make your money work for you.
If you’re a little on the conservative side, you can put your money in a savings account. You’ll want a savings account that has a decent interest rate. According to Value Penguin’s latest figures, standard savings accounts have interest rates of .06% to .09%.
Savings accounts may lead to smaller financial gains. Just look on the bright side though — they’re safer and insured by the Federal Deposit Insurance Corporation (FDIC).
If you want quicker growth, here are a couple of options to consider:
A Savings Account for First-Time Homebuyers
These types of savings accounts are available in certain states. So, you’ll have to check with your bank.
These types of savings accounts are usually checking accounts. They allow people who are buying houses for the first time to save money in an account dedicated to home purchases.
The major selling-points of these accounts are:
- They’re easy to set up
- They prohibit transferring funds unless it’s for a home purchase
Brokerage Funds or Accounts
Brokerage accounts allow banks or financial institutions to invest your money. Your money can be invested in things like stocks, foreign exchange, and mutual funds.
Of any account, brokerage funds or accounts can yield the highest growth for your money. This is excellent news if you want your saving time to be shorter.
However, know that there are risks.
Sure, these investment funds have higher returns than savings accounts. Of course, with greater returns comes greater risks.
Stocks and the money markets can be volatile. Hence, the money in your investment account can go up or down depending on the market.
Should you put your home down payment money in such an account? This is where your risk-tolerance comes in.
If you’re a risk-taker who prioritizes big returns, a brokerage account may be for you. On the other hand, you’d be better off with a savings account if even the thought of Vegas causes you to sweat.
In other words, it depends.
Tip 6: Put Other Savings on Hold for a While
Making a down payment on a home is far from cheap. For this reason, you’ll need money from every source you’ve got access to — including your other savings.
Your other savings can include:
- Your retirement savings
- College fund
- Emergency funds or accounts
Of course, you’ll have to check with your bank if you’re allowed to transfer your funds from these sources. After all, some accounts may be withdrawable only under certain conditions.
Tip 7: Consider Auto-Debiting towards Your Home Savings Account
Willpower can only get you so far. You’ll save better if some of the money from your paycheck automatically goes to your down payment account.
This is where auto-debit comes in. This is easy to set up with any bank. All you need to do is ask about how to link your payroll account to your savings account.
By doing this, some of the money you make is automatically saved. If you also put money into your home savings account yourself, you’ll get twice the savings.
Still Not Sure About How To Save Money for a Downpayment on a House?
Saving money to make a down payment on a home can be a real test of discipline and resourcefulness. However, many Americans have done it. It’s not impossible.
If you need help making the first few payments towards your new home, reach out to us now. We at 121 Financial Credit Union are in your corner in every financial challenge you wish to undertake.
Call us if you want to know more about our home mortgage plans and loans! We are also a call away if you need a home equity loan that you can afford!