Buying real estate can be so overwhelming! When you consider buying a house, you start to think: How much do I need for a down payment? Saving money requires a plan, but I haven’t made a budget since I was a kid with an allowance.
If these thoughts occupy your mind, this article is a great find. We’ll help you hone in on your habits, reallocate your resources, and pump up your potential on the job.
Real Estate Basics: What Do I Need for a Down Payment
Let’s start at the beginning and determine how much money you will need to cover home ownership’s most significant upfront cost: the down payment. The amount you need to save for the down payment depends on your personal finances and timeline. Below are a few scenarios to consider.
The Elusive 20%
You may have heard that a buyer should be prepared to put 20% down at closing. For a $200,000 house, that is $40,000. Wait, $40,000 is a lot of money, you’re thinking, why should or shouldn’t I?
It’s important to understand why a 20% down payment may be the right choice for you.
- With a 20% down payment, you won’t need to buy private mortgage insurance (PMI). PMI is an additional cost paid by the buyer (usually every month) to the lender to protect the lender if the buyer defaults on the mortgage. For down payments that are less than 20% of the home cost, most lenders require PMI.
- Mortgage lenders may be willing to lower the interest rate on your loan as they view a buyer who makes a larger down payment as less of a risk. While reducing a 7% interest rate to a 5% interest rate may not seem like much, a difference of 2% spread over years of mortgage payments makes an impact.
- Sellers view a down payment of 20% as a sign of a buyer’s financial security. A seller is motivated to choose the most financially stable offer when considering multiple offers.
No PMI, lower interest rate, and having an edge over other buyers definitely sounds great!
However, putting 20% as a down payment may not work for you in light of these conditions.
- It will take too much time to save that amount. Possibly, you are moving because of a job change. Relocation must take place within a set number of months.
- A 20% down payment takes too much of your available income. You don’t want to deplete your emergency fund or not have enough to cover other moving-related costs (e.g., furniture movers, closing costs).
Lower Down Payment Options
You may have determined a 20% down payment isn’t the right fit for you. There are plenty of other options to consider. If you’re going deep on this topic, Essential Advice for Buying Your First Home and Navigating Through the Mortgage Loan Process is a must-read.
The terms of a conventional loan are unique to the lender (e.g., mortgage company, bank), so you will want to read all the conditions thoroughly. Some conventional loans allow as little as a 3% down payment, depending on the borrower’s credit score data and income.
A Federal Housing Authority (FHA) loan is another option with a lower down payment. The down payment may be as low as 3.5% of the house’s cost. The key differentiator with an FHA loan is that the FHA insures the home in case the buyer defaults on the loan. As such, the FHA has a specific set of requirements for borrowers.
A lower down payment option may be your route based on these reasons.
- You’re purchasing your first home and are unfamiliar with the nuances of home ownership. You may want to retain an amount of cash for unexpected expenses (e.g., water pipe bursts) and maintenance (e.g., maintenance service for the heater and air conditioner).
- Having less to pay upfront decreases the amount of time you’d have to save in order to pay a larger sum upfront.
A lower down payment comes with tradeoffs.
- You will have a higher monthly mortgage payment.
- You will be required to pay PMI.
- Lenders will be rigorous in reviewing your financials (e.g., income, debt, savings, and credit scores).
- Lenders can set other conditions, such as what firms are permitted to conduct inspections or offer appraisals.
Armed with the knowledge of various down payment percentages and their pros and cons, you can establish the approximate amount you need to save.
It’s time for the next step. We’re going to introduce a time-tested tool for racking up savings. Meet the budget.
Bring on the Budgeting
We can hear your grumbling. Yuck! Budgets mean restrictions, you may be thinking. We get you.
Consider this. Budgets require rearranging and delaying, not restricting.
You probably don’t eat at four-star restaurants every evening or sleep until 11:30 a.m. each morning. You might eat at a fancy restaurant once per quarter or sleep in on a weekend day. Therefore, you aren’t wasting money on a daily fast-food lunch and you avoid early-morning jogging dates on the designated sleep-in day.
You already get the concept of budgeting. You plan and make concessions to achieve a larger goal.
Let’s take that concept and make it a bit more concrete.
Know how much money you are earning every month. You may be a salaried employee, or you’re compensated for hourly work with the ability to earn overtime. Perhaps you are paid a base amount with the opportunity of tips or commission. Over a set period of time (a range of months), establish an approximate monthly income expectation.
Expenses come in many forms. Common expenses include housing, transportation, medical care, insurance, childcare, and credit card payments. Other expenses are in the form of debt (e.g., student loans), lump sum payments (e.g., federal, state, and local taxes), and entertainment (e.g., streaming services, and club memberships).
When you identify and analyze your recurring costs, you can see how they stack up against your monthly income. From that point, you’ll be able to make informed decisions on what activities you want to rearrange or delay as you work toward accumulating the down payment for your real estate purchase!
You have a range of realistic down payment amounts, and you have your budget in hand. Now let’s focus on what you can rearrange or delay through seven strategies.
Rearrange or Delay Expenses
We’ve come up with five activities that involve rearranging or delaying specific expenses to build up that bank balance. We suggest trying one or two. If they aren’t a fit for you, try the next suggestion.
While often associated with moving from a larger residence to a smaller one to save money, we’re talking about downsizing your expenses. Pull up the budget you created and consider the line items (e.g., electricity, gas, grocery).
Downsizing when it comes to electricity may look like this.
- Turn off the lights when you exit the room. You might need light to avoid tripping over your futon; your sofa doesn’t have the same problem.
- Use the “energy saver” feature on your clothes dryer. Newer dryers often have a setting that allows them to run for the shortest amount of time using the least amount of heat.
- Use lower-wattage bulbs or bulbs that are marketed as energy efficient or environmentally friendly. They are constructed to use less electricity.
Downsize the amount spent on gas through these methods.
- Consolidate errands that require using your vehicle. If you’re going grocery shopping, it’s wise to return library books to the library at the same time.
- If you live in an area with accessible public transportation and walkable thoroughfares, amp up your step count while fattening your wallet and walking to the station instead of driving.
- If you have kids with after-school activities, consider carpooling with another family.
Downsize the grocery bill by trying some of these ideas.
- Buy off-brand products if the quality is comparable. Look for non-negotiable attributes (e.g., toothpaste with a whitening agent or high-absorbency diapers) but then buy the least costly brand with those attributes.
- Get into the food-prep craze and forgo premade meals. Check out Instagram or even TikTok (yes, you read that correctly) for ideas. The food-prep craze is founded on the idea of buying in bulk and creating individual servings. Unprocessed foods like raw vegetables, rice, and ground turkey cost less than prepared foods.
Put a Hold on Habits
Habits can get expensive. We are not suggesting you ditch date night, nix the nail appointment, or halt Hulu. We suggest that you examine your habits and question what you can rearrange or delay without forfeiting the happiness derived from the habit.
Redo date night. The point of date night is to enjoy the one-to-one time. The happiness derived from the habit of date night isn’t drawn from a particular setting.
Retreat from the restaurant! Walk in a new neighborhood while viewing the real estate. That will remind you of the reward you’ll be reaping, which is having enough for the down payment.
Not willing to part with well-manicured nails? That’s no problem. Consider a nail salon if your favorite nail nook is a higher-end spa setting. Not your scene?
Be like a teen, and check out Insta feeds for DIY nail ideas. Many influencers on social media feed showcase the latest and greatest trends, light years ahead of stuffy spas. You’ll be ahead of the curve as well as conserving cash.
Who doesn’t love streaming services? Being able to binge your favorite series is a reward after a long workweek. That said, the monthly cost for streaming adds up.
Consider whether you need Hulu, Disney Plus, and HBO Max. Pick one streaming service and cancel it once you’ve finished the series. Pick a streaming service and commit to it for a year, exploring new series instead of hopping between a variety of streaming services.
Down with Debt
A mortgage lender will want to know what debts you owe as they determine whether they will give you a home loan. If you are loaning someone who already owes money to others, your concern is that they may not be able to repay your loan.
Therefore, it is beneficial to have a low debt-to-income ratio. Your debt-to-income ratio is computed by comparing your monthly debt to your monthly income.
Not all debt is equal. For example, the interest rate for federal student loans is typically much lower than a credit card interest rate. It may be beneficial to first pay off the debts with the highest interest rates. Spend time reviewing the interest rates on the debts you have to make this determination.
Ask any Girl Scout how they are paying for a troop camping trip. We bet the answer will have something to do with selling cookies. The magic word is “selling.” Unlike the Girl Scouts, who have to pay the cookie manufacturer for the cookies, selling something you own is pure profit.
Scroll through the list and see if you recognize anything in your garage, storage shed, or attic that is unused:
- sports equipment
- exercise equipment
- small appliances
Gather some like-minded friends or neighbors and have a joint sale. If you don’t have time to organize an event, list the items and their prices on your social media. If you’re not into social media, see if the community center or local library will allow you to post a notice on their bulletin boards.
If your space is large enough and isn’t filled with unused things, you may consider renting it. Before pursuing the idea, familiarize yourself with the requirements (e.g., additional insurance) and risks involved with renting your property. Reviewing the terms applicable to renters on sites like Airbnb or VRBO will give you a gist of your responsibilities. It is advisable to have additional advice from legal counsel, a realtor, or your local chamber of commerce.
Increment and Maximize Income
Thus far, our money-saving suggestions sprouted from what you can remove. Let’s turn the tide toward what you can add to bolster your bank balance.
Maximize Your Job
Take stock of your employment situation. Is there a possibility you’ve taken on new responsibilities and can approach your manager about a salary increase? Alternatively, approach your manager about a potential salary increase for you, putting in overtime, or taking additional assignments.
Get a Second Job
If your job ebbs and flows, consider part-time or freelance work. If you teach during the school year, consider tutoring during the less-busy summer months. Alternatively, if your workday adheres to a nine-to-five. schedule, sign on for a few evenings per week working in retail during November and December.
Yes, it is ambitious and tiring to have a second job. If your current commitments and mental health are not at risk, remind yourself you won’t be doubling up forever. The expended effort is short-term for long-term (real estate) gains.
If your family and friends commemorate birthdays and holidays with presents, do you feel comfortable asking for a gift of money? Gift-giving etiquette has evolved, especially since the advent of Amazon Wish Lists and gift cards.
Many prefer to give their loved ones something specific they know will be valued and appreciated. If this describes members of your family or if they ask, “what do you want for Christmas this year,” let them know how grateful you’d be for contributing to your down payment fund.
If you’re not comfortable with asking directly, gauge their receptiveness first. Maybe your Aunt Miriam hosts a monthly dinner. When the small talk moves your way, be candid about the extra work shifts you’ve picked up and the budgeting involved. If a cousin or sibling asks if there is anything they can do to help, don’t be shy.
The act of purchasing real estate, specifically having enough for a down payment on a home, is a large task. Within this post, we’ve divided the large task into small and manageable pieces.
You understand the basic principles applicable to a down payment and the factors that influence the amount of the down payment. You learned that budgeting does not require you to be a financial genius; you only need insight into your incoming and outgoing cash flows.
Finally, we suggested seven simple strategies that allow you to be flexible in your approach. You can move or minimize expenses. You can increase your income.
The operative word is “you.” You get to choose how you mix, match, and modify. Our suggestions are ready to be tailored to your situation.
****If you are interested in keeping up with my blogs. Please join my newsletter or my Facebook group, Home Buying & Selling Resource Community. If you are on the fence about buying a house, pick up a copy of my book Essential Advice for Buying Your First Home and Navigating Through the Mortgage Loan Process. I just released a second book A Look Into the Secrets of Credit Repair: How to Fix Your Score and Erase Bad Debt. Both are available on Amazon in print, kindle, or audiobook format.