Tips for Saving for a Down Payment
More now than in recent years, new homebuyers faced the daunting task of saving up the down payment. Before the sub-prime financial meltdown, buyers could qualify for a mortgage product with five percent, three percent or even zero-down payment requirements. Now, however, except for a few special government-backed products that we will discuss below, most lenders require a 10 percent down on a 15-year mortgage and 20 percent down on a traditional 30-year mortgage
Since most buyers opt for the lower payments involved in the 30-year products, we can assume that our goal is 20 percent. So, 20 percent of what, exactly, are we establishing? Before you decide how much you need to save, you have to determine how much you plan to spend, or, how much you can afford to make payments on
To determine how much house you can buy, unless you are very good with numbers, you will need a mortgage calculator. There are several free online mortgage calculators to choose from, so you do not need to spend anything to get started
Play with the numbers using standard interest rates until you come up with a payment that is affordable. That mortgage amount will equal 80 percent of the sale price of the home you can buy. The other 20 percent is your down-payment savings goal. If you can afford a $250,000 mortgage, you’ll need to save up $62,500 as the 20 percent down payment on a home selling for $312,500
How will you save up $62,500? With determination and some sacrifice. Here are some tips to make saving up less painful:
- Develop a savings plan.
This might seem like a no-brainer, but lots of people start home shopping and get their heart set on their dream home before they have a plan to save up the down payment. The fall out is that they try to cut corners in the down payment process—which is where the sub-prime mortgage fiasco started. Set the date that you want to have the money in hand. Without a timeline, it is easy to continually put off saving. An end date gives you both a sense of urgency and the ability to continue working your plan because there is an end in sight
- Open a separate account for your down payment funds.
For shorter timeframes, just open a money market or savings account, or once your savings reach $2,000 or so, consider a shorter term Certificate of Deposit. Although making interest is valuable, your goal is to make the money harder to access for everyday expenses or emergencies
- Set up automatic paycheck deductions.
If your employer has the option to make automatic deductions from your paycheck you can have them put directly into your down payment funds account. Since you will not see the money in your paycheck, you will miss it less than if you move it into savings after you have received it. Whenever you receive a pay raise, increase the amount that goes into savings accordingly
- Use a budget tool to determine where you might be overspending.
Your plan should start with an assessment of your income and outgo. There are lots of cash management tools available to help you determine where your money goes. Mint.com is a free tool available online with apps for smart phones. Once you enter your information, it will track your debt, spending habits, investments and other financial information and offer options for savings you may qualify for. For example, you might be able to pay less for insurance or get lower credit card rates. With a savings plan, any time you can reduce one payment, the one-time or monthly savings should go into an account to fund your down payment, not back into your lifestyle
- Deposit your tax refund checks directly into your down payment account.
The IRS and most states allow tax refund check to be automatically deposited. If you do not have the check in hand, you are less likely to spend it on something else
- Get a credit card with a “cash back” program.
If you use a credit card, find one that has a rebate program that is optimal for your spending habits. If you commute to work, for example, one that gives three percent back on gas is better for you than one that gives you a rebate for buying at an online store where you rarely shop. Whenever the rebate check comes, deposit the money directly into your down payment account
- Use store coupons and rebate programs.
This tip takes a little sleuthing, but the savings can add up. Check to see if any of your purchases qualify for a rebate. Cell phones, small appliances, groceries … lots of purchases qualify and there are websites dedicated to teaching you how. Just make sure that the money you receive in the rebate check goes directly into your down payment savings. When couponing, most store receipts list how much you “saved” buy using a coupons or store loyalty cards. While this method takes some discipline, making an immediate transfer of these small amounts into your savings account can start to add up
- Get rid of monthly payments that take a chunk out of your paycheck (and resist adding others).
This one is harder to maintain over time, so consider carefully what you can do without and what you need to live happily. Do you consistently use that monthly gym membership? The monthly movie club? Do you need all the cable channels or does your provider have a less expensive plan that still has all your favorites? Do you use all of your cell phone minutes each month or can you drop down a level? Check with providers to see if bundling services makes sense. Sometimes it does, but other times it might cost you more
Less traditional ways to add to your down payment fund:
- Ask for monetary gifts for birthdays and holidays and put them directly into your fund.
- Check into the FHA Bridal Registry Program
If you are not married yet (and even if you are), set up a “bridal registry” account at your bank or credit union and have gifts put directly into your down payment fund. Be sure to follow the FHA rules for this account.
- Check with your employer. Some larger companies and universities have homebuyer programs for their employees.
- Sometimes, cities, counties or states have programs to assist low and medium income homebuyers in revitalization areas or for foreclosed or distressed homes. Check carefully, however, because often they have stricter qualifications and require the homeowner to live in the home for a specified period.
- Sell anything and everything that you do not need or are not using. “One man’s junk…” Use sites like http://www.etsy.com/ or www.ebay.com to sell collections, leftover art supplies, vintage clothing or crafts. www.craigslist.org is great for selling unused furniture or electronics.
The temptation will be to return these savings to your lifestyle. Keeping your goal in front of you and an end-date in mind will help you stay on course.