How to save for a down payment on a home

Failure to provide a down payment and closing costs is one of the top three reasons non-landlords continue to rent, according to a recent Bankrate survey. However, it is not impossible to cover these costs. Funds for a down payment on your first home might be closer than you think.

How much should you save for a down payment?

While you may have heard that you need 20% of the purchase price of the home as a down payment (and there are a few reasons why putting down that much is ideal), the reality is that most mortgages have much lower rates. minimum down payment requirements:

Conventional loans

If you qualify for a conventional loan, you could put down just 3% of the purchase price. If you buy a house for $300,000, that’s a down payment of $9,000. There is a catch, however:

You will be required to pay private mortgage insurance premiums each month until you have accumulated 20% equity ($60,000).

FHA Loans

If you are considering a loan guaranteed by the Federal Housing Administration (FHA) and you have a credit score of at least 580, you will only need a down payment of 3.5% of the purchase price. On a $300,000 home, that works out to $10,500. All FHA insured loans also require mortgage insurance, both an initial premium and an annual premium that you will pay for the life of the loan. Important to note: You will need to provide a 10% down payment on an FHA loan if your credit score is between 500 and 579.

VA and USDA Loans

If you qualify for a loan backed by the Department of Veterans Affairs (VA), you can buy a home with no down payment. Likewise, if you’re buying a home in a USDA-designated area and you qualify for a USDA loan, you won’t need to make a down payment.

Giant Loans

If you are considering borrowing a mortgage for a more expensive property, you may need a jumbo loan. This type of mortgage exceeds the limits set by the Federal Housing Finance Agency and tends to require a higher down payment. The specific amount varies by mortgage lender, but you’ll likely need to pay at least 10% of the purchase price.

How long should you plan to save for a down payment?

The time it will take you to save for a down payment depends on:

  • How much money you can save
  • How much you can or want to spend on a house
  • How much you plan to contribute to the down payment

Where you buy will also play a big role in how long it takes you to save. Consider that the the median down payment in California in March 2022 was $103,000, while the median down payment in Mississippi was less than $7,000.

If you’re already on a tight budget, coming up with a 10% or 20% down payment can take a long time. So if you want to save enough money in just a year or two, plan for a low payment loan and consider these tips:

10 ways to save for a down payment

1. Park savings where you can make more money

Before you start accumulating funds, think about the best place to store them. Compare high yield savings accounts, money market accounts and CDs. While traditional CDs come with penalties for early withdrawals, it might actually come in handy here: with the added restriction in place, you might avoid the temptation to dip into your deposit savings for other expenses.

Be mindful of the timeline, though. If you want to buy a house within the next two years, for example, you’ll want to watch 18-month-old CDs. That way you’ll have an extra buffer if you decide you can buy even sooner.

2. Organize your CDs

If you decide to keep your deposit on a CD, you can maximize your earning power by opening different CDs on different maturity dates. Instead of one big CD, for example, split your money into three-month, six-month, and one-year certificates. This is called laddering, a strategy that gives you the flexibility to adjust your investment as rates change. Staggering also allows you to lock in a higher rate. When rates aren’t so favourable, laddering saves you from being stuck with low yields for a long time.

CD rates are not very high today, but should rise as the Federal Reserve continues to raise interest rates this year. CDs are also FDIC insured and do not have the same risk and volatility as the stock market.

3. Automate your savings

One of the best ways to save for anything, including a down payment, is to set it and forget it. If you receive a regular salary, ask your employer to put part of this payment into a savings account. If you’re self-employed or an independent contractor, set up a recurring transfer from a checking account to a savings account to establish routine.

4. Look for down payment matching programs

The road to saving for a down payment doesn’t have to be a solo trip. Depending on where you are banking, you may be able to find a matching program where the bank or lender contributes a specified amount for every dollar you invest in buying your home. For example, Lower is offering homebuyers up to $500 in matching.

5. Look for help in your state or city

There are many programs for homebuyers who find it difficult to save for a down payment, especially first-time buyers. If you can meet certain income limits, you may also be able to get help from your state’s housing agency. There are deferred loans (loans you won’t repay until you sell the house or finish paying off the mortgage), forgivable loans (loans whose balance will be wiped out if you live in home for a period of time) and other down payment assistance options.

6. Review your expenses

If you want to save more, find ways to spend less. This means carefully reviewing your monthly bank statements to determine where you can cut. Do you really need a subscription to Netflix, Hulu, Disney+ and all the other entertainment services? How often do you actually use your gym membership? Can you start making coffee at home instead of having one at the cafe down the street every morning? Although these are seemingly small expenses, every gesture counts.

7. Ask for a raise

We are in the midst of the Great Resignation and many employers are struggling to retain talent. It’s an employee market right now, so put that power to work. Just be sure to do your homework and base your request for a raise on your accomplishments and the company’s salary scale, not your housing needs.

8. Ask for a gift

Many first-time home buyers have turned to family members for help with a down payment. If a family member or friend is willing to give you funds for your home, be sure to document this in a gift letter for your lender.

9. Press pause on other savings goals

If you’re decades away from leaving the workforce, it might be a good idea to consider transferring some of your retirement savings towards your more immediate goal of home ownership. It should only be a temporary savings strategy — one you’ll carry over into retirement once you’ve moved into your new home.

If you have a substantial nest egg, tax law allows you to withdraw up to $10,000 in IRA funds to purchase your first home. If you’re married and both are first-time homebuyers, you can each withdraw from your retirement accounts, which means a potential down payment of $20,000.

Even better is the IRS’ definition of first-time home buyer: Technically, you don’t have to buy your very first home. You can benefit from the tax rules as long as neither you nor your spouse owned a principal residence at any time in the three years prior to buying the new home. In these cases, Uncle Sam waives the early withdrawal penalty, but with regular IRAs, you’ll have to pay taxes on the money (plus a penalty if you’re under 59½). Withdrawals from Roth IRAs, however, are tax and penalty free.

If your money is in a 401(k), avoid taking money out, no matter how badly you want to own a home. These withdrawals are subject to a 10% tax penalty.

10. Go Home

The last tip on our list may seem like a last resort, but it really is one of the best ways to save money for a down payment: reduce or eliminate housing expenses altogether.

With rental prices rising across the country, it might be time to consider whether sleeping in your childhood bedroom again could be the difference in saving your dollars. The average monthly rental cost for a one-bedroom apartment was $1,751 in May 2022, according to Rent.com. If you were to forgo that payment for a full year, you’d be sitting on over $21,000 for your down payment. Once you’re settled, just be sure to invite your family over for a thank you dinner.

About Matthew R. Dailey

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