Buying a home is so overwhelming! How much do I need for a down payment? Saving for a home requires a plan, but I haven’t made a budget since I was a kid with an allowance. According to the latest figures from the U.S. Census Bureau, about 35% of American households don’t own their home. Existing homeowners often have equity from their current properties to put toward their next home, but first-time homebuyers are more likely to start saving from scratch. It’s helpful to break down the costs of buying a home and here are some tips on saving for those expenses.
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: Determining Your Down Payment Requirements
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 a home down payment depends on your personal finances and timeline. Below are a few scenarios to consider.
The Elusive 20% Down Payment
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?
Understanding why a 20% down payment may be the right choice for you is important.
- 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 sounds great!
However, saving for a home and 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).
Exploring Alternatives: Lower Down Payment Solutions for Homebuyers
You may have determined a 20% down payment isn’t the right fit for you. Saving for a home can be a challenge. 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 time you would need toward saving for a home instead of paying 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 for a home.
It’s time for the next step. We’re going to introduce a time-tested tool for racking up savings. Meet the budget.
Budgeting and Saving for a House
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 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.
Maximizing Income Sources to Accelerate Home Savings
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.
Analyzing Expenses: Optimizing Spending to Boost Home Savings
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 can decide what activities to rearrange or delay as you work toward saving for a home by 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.
Strategies to Adjust and Postpone Expenses for Saving towards a Home
We’ve devised 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 time using the least heat.
- Use lower-wattage bulbs or bulbs 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 simultaneously.
- 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 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 you examine your habits and question what you can rearrange or delay without forfeiting the happiness derived from the habit. Saving for a home will be more rewarding than a spur-of-the-moment purchase, and a few nights in with your partner, making dinner, and playing board games will be just as enjoyable (if not more) than going out for dinner. Exercising at home or walking around the block can become a daily activity that boosts physical and mental health. Weighing which habits are worth spending for versus which
Redo date night. The point of date night is to enjoy one-to-one time. The happiness derived from the date night habit 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: having enough for the down payment.
Not willing to part with well-manicured nails? That’s no problem. Consider a salon if your favorite nail nook is a higher-end spa setting. Not your scene?
Like a teen, check out Insta feeds for DIY nail ideas. Many influencers on social media feeds 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? Borrowing 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 various streaming services.
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 be unable 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 your debts 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.
You may consider renting some of your space if it’s large enough and isn’t filled with unused things. 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 to help in Saving for a Home
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.
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.
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 they know will be valued and appreciated. If this describes family members 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.
Purchasing real estate, specifically saving for 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 being 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. 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 want to keep 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.