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Sep 27, 2021 | By Benie Khan
How to Save For a Down Payment

How to Save For a Down Payment

You're tired of renting and you're ready to join the 65% of Americans who own their own homes. The first step is to think about finances.

The vast majority of first time home buyers will need a loan, or mortgage, to purchase a home. All mortgages require some sort of down payment, or a minimum percentage of cash. Unless you qualify for a VA home loan, which has no down payment.

Depending on the type of loan - home buyers will need a down payment between 3%-20% of the new home price.

The most ideal option is to put a minimum of 20% down payment on your home.

Paying less than 20% of the home's cost could saddle you with an additional expense called PMI (Private Mortgage Insurance). Taking more time to save before buying can mean spending less money in the long run.

Saving 20% of a home's price is a lot of money for most people.

It's not something that will happen overnight but there are steps you can take now to save for that home purchase in the future.

You don't need a 20% down payment.

How much to save?

Some people start saving for a home without any idea of their end goal.

If you know an area of town where you'd like to live, use that as a starting point to calculate how much home you can afford. A good rule of thumb is to ideally keep your mortgage around 25% of your monthly income.

This allows plenty of room for fixed expenses and any home issues that might arise, like a burst water heater or leak in the roof, without being dragged further into debt.

This is also a good time to reassess your home goals. Perhaps a condo or a smaller home in a neighboring community is a better first option, especially if the homes in that area have maintained their value.

Once you have an idea of the size home you can afford, calculate how much money you need to save for a down payment and how quickly you'd like to reach your goal. You may need to adapt your spending habits or adjust your timeline to achieve it.

Not sure how much to save? Check out this article about the different down payment options.

Budgeting for Beginners

If you don't already have a budget in place, now is the perfect time to create one.

To create a budget, first identify how much income your household earns on a monthly basis. Next focus on expenses, identifying fixed expenses (rent, loans, utilities, internet) and variable expenses (groceries, entertainment, gasoline). This snapshot of how money enters and leaves is the starting point to saving for a down payment on a home.

Plenty of apps can assist in building and maintaining a budget, and many are free. Sometimes having an app remind you to save rather than spend is more effective than a friend raising a questioning eyebrow.

The Mint app is consistently ranked one of the best budgeting tools. It's free, startup is easy and it easily connects to all of your financial institutions including credit cards. It's perfect for determining where you're spending your money and provides a great amount of detail, but the phone app is not as effective for creating savings goals.

PocketGuard has a free version that's easy for first time budgeting. The app links to your financial institution, then analyzes expenses to determine where money is being spent compared to previous months. However the free version only tracks the previous three months and details are not as robust as The Mint.

Good Budget is the perfect app for those concerned with sharing account information. All income and expenses must be entered manually, but it's easy to create savings goals and track spending. The free version is limited to ten spending categories however, and all future transactions (income and expenses) must be entered by hand to ensure your budget is staying on track.

Check with your bank to determine if they have free budgeting tools available.

Many larger institutions offer this service, which means you can get started more quickly.

Find saving opportunities

Once your budget is in place ensure you've paid off as much debt as possible.

Paying off any debt - whether credit card, car or student loan - will help both in obtaining a loan and allowing you to save even more over time.

Analyzing variable expenses is often the best start to find ways to save. Rather than spending money at a coffee shop every day, buying a coffee maker and brewing at home could save up to $1,000 on an annual basis.

Purchasing groceries on sale or eating at home versus dining out will also save big bucks in a relatively short period. Cancel recurring expenses like the gym, a music account or streaming services. Try surviving without them for a few years or find less expensive alternatives.

There also may be opportunities to save with fixed expenses. Turn off  lights when you leave the room and adjust the thermostat to save money on an electric bill. If you're paying a lot for Internet or phone, check other options to see if you can get a lower rate.

If you've been with the same company for an extended period of time, they may offer a loyalty discount if you don't switch to a competitor.

One fail safe way to avoid spending money you want to save is to never see it in the first place. If your paycheck is automatically deposited, adjust your account so that a certain fixed amount from each paycheck goes directly into savings. If it goes into an account dedicated to a down payment, any temptation to spend that money is gone.

Sometimes these small changes can really add up, but so can unnoticeable changes in each spending category. Reducing spending in each category by 5-10% can add up quickly in a year.

It's also a good place to start for those new to having a budget and not ready to make drastic cuts.

So instead of dining out once a week and spending $100, perhaps eat at a less expensive establishment or order a less expensive meal and spend only $90. In a year that adds up to $520 towards a new house.

The flipside to lowering expenses

Reducing spending is one way to save money; another option is to increase income by taking a second job during your normal off hours.

Put 100% of those earning into an account specifically earmarked for a house. This temporary extra work can help you reach your home buying goal even more quickly. If your free time is limited, consider opportunities that are inconsistent such as pet setting or dog walking. Or try selling unused items on auction sites or at clothing consignment shops.

If you have vintage or unique items, see if there are websites dedicated to that brand. You may discover you have a hidden treasure that enthusiasts would be eager to purchase.

If you're recently married, it's very tempting to enjoy a dual income, no kids lifestyle. Yet this is the perfect time to set aside one person's entire salary.

You may be able to save enough for a down payment within a few short months.  

Need to know your down payment options? Check out this article >>> Down payment options.


Ultimately your goal is to decrease your expenses and perhaps even increase your income, all in an effort to save for a down payment.

The short term sacrifices require a lot of hard work and dedication, but the long term reward will make it worthwhile.

Read on: What credit score is needed to buy a house?

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