Saving for a first down payment is one of the most significant financial challenges most people face.
Saving is always important. But a down payment is always a significant lump sum, with regular mortgage payments following.
So, let’s go over the basics of saving for a down payment.
How do I get money for a down payment?
The first step is to have a budget.
We’ve talked about budgeting a lot here. But it really can be very difficult to save for anything without one. So, if you don’t have down payment savings baked into your budget, that’s the first step.
After that, it’s helpful to have a specific target. If you haven’t already chosen a home (or a few homes), find a few to use as a benchmark. Take the average down payment and make that your first goal.
Beyond a budget, there are a few simple tricks you can use to make the process more convenient.
Automated Savings
You can always set up automatic transfers to help save for a down payment. Set up regular, manageable transfers from your checking account to savings.
For something as big as saving for a down payment, a separate savings account may be in order. Regardless, the result is that a portion of your earnings will always be added to your down payment savings.
Debt first, down payment later
If debt is wearing you down, it makes more sense to deal with that as a first priority.
Saving for your down payment is important. But debt interest can be extremely destructive and affect every facet of your financial life. That includes down payments for houses.
As your debt burden is lowered, it quickly becomes much easier to save for other things. Interest payments on credit cards are essentially wasted money that should have been directed elsewhere.
There’s one other excellent reason to prioritize reducing your debt first: your credit.
Reducing your debt-to-income ratio improves your credit score. Banks see you as a more trustworthy borrower, meaning you can get access to better deals. The benefit is indirect, but it means savings that add up over the years as you pay off your mortgage.
Don’t blow your windfalls
Win a lottery? Get a bonus? Tax refunds? Unexpected inheritance or other gifts?
Save it!
Receiving a lot of money that you didn’t expect is cause for celebration. But instead of celebrating too hard, put the money into your down payment savings fund immediately.
Invest
The right investments can help grow your savings account enough to make a down payment.
The focus is something beyond just leaving the money sitting around but without risk.
High-yield savings accounts make saving much easier. At least they fight inflation while you save. Since there’s no risk involved, they can make a lot of sense.
Some low-risk investments appropriate for saving for a down payment include:
- Certificates of deposit
- Municipal bonds (tax advantages, too)
- Treasury bonds
What is the down payment requirement in the USA?
The standard down payment requirement in the USA is 20%. You can still make down payments of less than that. However, you’ll be required to purchase Private Mortgage Insurance (PMI).
PMI is an added insurance layer used to protect lenders if home buyers end up not being able to repay their mortgage. It’s an expense that is added to your monthly mortgage bill, so you do end up spending more every month.
The extent to which PMI increases your monthly housing expenditure depends on:
- Your credit score
- Your loan-to-value ratio
- The insurer
In general, you can end up paying anything. The ballpark varies widely, but unless you’re a truly unusual case, it will probably add up to $30 to $160 per month per $100,000 borrowed.
Normally, once you’ve reached the threshold of having paid back 20% of your mortgage, you can have your PMI canceled. This reduces your monthly bill.
It’s worth considering the implications of making a down payment of less than 20%, as your down payment will be much lower, but you will pay more per month for at least a while.
First-time home buyer assistance programs
The US has many local first-time home buyer assistance programs.
There are also some programs available across the US based on other criteria.
Some sites like this mortgage assistance program information provider and directory provide an exhaustive list. You should take advantage of these programs which were meant to help people just like you afford their first homes.
How long does it take most people to save for a down payment?
It always takes time to save for a down payment. It’s likely one of the largest transactions you will make in your life. But the timeframe varies depending on income, expenses, and other factors.
The timeline will generally be several years unless you’re living with family and being extremely frugal. The exact amount will depend on:
- How much you are able to save each month
- The housing market where you’re planning on moving to
- Your expenses and lifestyle
- Your down payment target (percentage)
Conclusions
Saving for a down payment is hard and getting harder.
But with the considerations we’ve gone over, it can be easier. It will require patience and budgetary discipline, but the payoff of owning a home is worth it.
Photo by Brian Babb on Unsplash
