A traditional down payment is 20% of the purchase price of a home. According to Zillow, the average home price in the United States equals $199,200. This means at least a $39,840 down payment. That’s a lot of money! You probably think it will take you years to save that much. The good news is you don’t necessarily need 20% down. Many programs, including conventional loans allow down payments as low as 3%. There are also simple ways to help you save the home down payment faster. We help you with some tips below.
Make Savings Automatic
Savings often lands on the back burner in many people’s budgets. Are you one of them? You aren’t alone. There’s a way to sidestep this issue, though. You can automate your savings. Simply set up automatic deposit with your employer. Pick a specific percentage of your paycheck and that amount will get deposited into your savings account each pay period. If you don’t want to choose a percentage, you can pick a set dollar amount as well.
Here’s an example:
Sally gets paid weekly. Her take home pay equals $1,500. She designates 10% of that amount to go into savings each payday. This means she puts $150 each week in her account. She doesn’t have to do anything; the money is automatically deposited. If Sally had variable income, the amount would change from week to week. It would always be 10% of her paycheck, though.
Add to Your Savings
Sally’s $150 a week won’t add up to too much too quickly, though. She’ll need more deposits if she wants a decent down payment. Let’s says he wants to buy a home for $150,000. The minimum FHA down payment requires at least $5,250 down.
Sally can add to her savings by stockpiling any windfalls. Tax refunds and employment bonuses are a couple of good examples. Don’t forget about raises, though. If you receive a raise, don’t spend the money. You lived without it before. Instead, add that amount to your automatic savings. This way you increase the savings faster and won’t change your spending habits. All too often, we instantly absorb a raise by living beyond our means. Saving it right away can prevent this.
Make Changes to Your Budget
Take a snapshot of the last few months of spending. Then take a closer look at the categories you spend the most money. Do you shop a lot, visit coffee shops, or eat out? These are a few examples of things you can cut out. You don’t have to live like a pauper, but saving for a down payment takes time. The more you can save, the faster you can get into a home.
Don’t just look at things you can cut out, though. Think of things you can possibly save more money on each month. Insurance is a big category where you can save money. Before you renew life, auto, or renter’s insurance, shop around. See if other companies have better rates. It’s common for insurance companies to rope you in with low rates but then increase them year after year. Why not be a new customer for another agent and take advantage of the savings?
Any money you cut out of your budget, instantly add to your savings. It’s best if you increase your automated savings. This way the savings occur without a second thought from you.
Get a Second Job
Getting a second job might not be something you desire, but it could help you get that down payment faster. Think of things you love to do. Are you a writer? Many companies outsource their need for copywriting. Maybe you love teaching kids – there are plenty of tutoring jobs available. People in the trades often offer their services on the side too. Electricians and plumbers are a couple of good examples. They work their regular 9 to 5 job, but then do side jobs on the weekends. They get to keep the entire cost of the job, helping them fund their down payment even faster. Once you meet your savings goal, you can give up the 2nd job, but for the time being it can help you reach your goals.
Borrow From Your IRA
The IRS allows first-time homebuyers to tap into their IRA. Carefully think about this before touching your retirement funds. The IRS allows borrowers to take out up to $10,000 out of their account. Keep in mind, though, there could be tax consequences. If you have a traditional IRA, you’ll pay taxes on the amount you take out. You do forgo the traditional 10% penalty for early use of the funds though. If you have a ROTH IRA, you can’t touch the funds until you held the account for 5 years. You don’t have to pay taxes on these funds because you already paid them, though.
Other Options for a Home Down Payment
If you can’t save enough before you want to purchase a home, you have a few other options:
- Gifts from family or employers – Many loan programs allow you to accept funds from family members or your employer. They do maximize the amount you receive, but each program differs. The FHA loan, for example, allows the entire 3.5% down payment to be a gift as long as it’s from a blood relative. Discuss your options for gift money with your lender.
- Down payment assistance programs – Some states offer down payment assistance programs for borrowers. Check with your local HUD office to see what options you may have. These are often grants (money you don’t pay back) helping you buy a home faster.
Saving for a home down payment doesn’t have to seem so daunting. It’s best if you start early. There are several options today for a low down payment program. Even conventional loans allow down payments as low as 3%. If you don’t have perfect credit, though, the FHA loan may be a better choice. This program requires a 3.5% down payment but is more flexible regarding your credit and debt ratio.
No matter which way you decide, make sure you only buy a house you can afford. Talk to your lender about the payments. Discuss whether you want a fixed or adjustable interest rate and how much the loan will cost you in the long run. Don’t forget, you’ll pay closing costs on the loan as well. If you can’t afford them, you have a few options including seller concessions or lender paid closing costs. There are many factors you must cover when shopping for a home loan. Make sure you know what is available to you and choose the loan that best suits your needs.