Steps to Saving for a Down Payment
By Lisa Fant
In the thick of the thrill of preparing for the homebuying process, the challenge of determining the right down payment and how to obtain it can be daunting for prospective homeowners. By breaking the process down into smaller, actionable steps and implementing effective strategies, you can achieve your down payment goal and take the next step toward homeownership.
Setting Your Down Payment Goal
According to the 2020 Downpayment Expectations Report conducted by the National Association of Realtors®, buyers cited saving for a down payment as the most difficult task in the homebuying process.
Prospective buyers often find themselves uncertain about down payment expectations beyond the misconception of a 20% standard, which, as the NAR 2022 Home Buyers and Sellers Report reveals, is not the norm for most first-time homebuyers. In fact, approximately 71% of first-time buyers put down less than 20% for their house purchase.
It’s important to set a clear and realistic savings goal. Begin by assessing your financial situation, including income, investments, and debts to determine a feasible savings amount. It may be helpful to factor in all the additional expenses associated with purchasing a home, such as closing costs, moving expenses, inspections, and an emergency fund for potential home repairs. Utilizing an affordability calculator can pinpoint the suitable price range for your prospective home, allowing you to determine the appropriate down payment to secure. Aim for a goal that aligns with your budget while offering favorable mortgage terms. This evaluation will help you determine the ideal percentage of savings tailored to your needs.
Create a Savings Budget
After determining a suitable savings goal, the next step is to allocate a portion of spending to your down payment. Budgeting is a dynamic process, and the amount you can save will depend on your financial flow and flexibility. Consider utilizing budgeting apps or tools to streamline financial tracking and gain a clearer picture of your financial flow. Tools such as Mint, YNAB, and Goodbudget can help you track expenses, set financial goals, and gain insights into your spending patterns.
Money Tips to Accelerate Savings
Automate Savings
Set up automatic transfers from your checking to your savings account to streamline savings and ensure consistent contributions. Check if your employer offers the option to directly deposit a portion of your paycheck into your savings account, further simplifying your saving efforts.
Maximize Savings in a High-Yield Savings Account
As you work toward your financial goals, consider putting your accumulating funds in a high-yield online savings account to maximize your savings. With competitive interest rates and the convenience of online banking, this approach can accelerate the growth of your down payment fund.
Minimize Unnecessary Spending
- Identify areas in your discretionary spending where you can cut costs without compromising necessities. Hidden expenses may include unused subscription services, high-interest credit card debt, bank fees, or overlooked refinancing opportunities.
Explore Down Payment Assistance
As a first-time homebuyer, you may have access to various down payment assistance programs. These initiatives are typically offered by state or local governments, nonprofits, or lenders, provide financial support, and aim to reduce the upfront costs of purchasing a home. Research and determine if you qualify for any of these programs, as they can significantly ease the financial burden of saving for a down payment.
Each program may have specific eligibility criteria based on factors such as your income, credit score, career, and the location of the property you intend to purchase. Take the time to explore the available options in your area. You may also choose to consult with a lender, financial advisor, or housing counselor who can guide you through the application process and help you determine the best fit for your circumstances.