Last Updated on June 21, 2023 by Bob Filipczak
Learning how to save for a down payment on a house can seem like a daunting task, especially if you are living paycheck-to-paycheck (and most of us are). However, with the right strategies and discipline, you can make your dream of home ownership a reality. Let’s look at 13 ways that can help you save for a down payment efficiently and effectively. From automating your savings to improving your credit score, we are confident you can do this.
“Don’t tell me where your priorities are. Show me where you spend your money, and I’ll tell you what they are.”
– James W. Frick
Savings has been forever tied to virtue, so if you are a good saver, you are also a good person. We can blame Ben Franklin for that. But when you are saving for something in particular, like a down payment, which leads to a new home, it’s a bit easier. A tangible goal makes saving money more real.
There are other paths to a down payment, but we are going to focus specifically on ways to save money for a down payment. We are not going to talk about eliminating the down payment through VA loans or USDA loans. There are also ways to reduce your down payment through FHA loans or Down Payment Assistance (DPA) programs. We talk about those in other articles.
13 Tips on How to Save for a Down Payment
1) Automate your savings
Automating your savings is a great way to make saving for a down payment a habit without even thinking about it. Set up an automatic transfer from your checking account to make monthly contributions to a dedicated savings account. This way, a portion of your income is consistently saved, helping you reach your down payment goal faster.
2) Know what you need
Before you start saving, an important first step is to have a clear understanding of how much money you need for a down payment. Research the housing market in your area and determine the ideal down payment percentage for the homes that are in your price range. Calculate the amount based on the home’s purchase price, as this will provide a specific target to work toward.
When you are doing your calculations, don’t assume that you need a 20% down payment. That’s ideal, but the median down payment in the United States is more like 13% – and 6% for first-time buyers. Talk to a mortgage lender. They can help you come up with a goal and set realistic expectations for a down payment.
3) Figure out your timeframe
Knowing how much time you have to save for your downpayment is an important step. If you have a longer timeline, you can save a smaller amount each month. However, if you have a shorter timeline, you may need to adjust your savings goals and allocate a higher portion of your income towards saving for the down payment.
4) Save your windfalls
Whenever you receive unexpected extra money, such as a tax refund or work bonus, resist the temptation to splurge and instead put that money (at least some of it) toward your down payment fund. These extra income windfalls can significantly boost your savings progress and bring you closer to achieving your homeownership goals.
5) Retirement savings for a down payment
The best option for using a retirement fund or 401(K) is to borrow from the fund. If you remove the money and just spend it, you will incur a 10% penalty from the IRS unless you are older than 59 years old. If you borrow from the fund, however, you can pay yourself back over time and avoid the penalty.
If it’s an employer-sponsored retirement fund, it’s best to check with your employer about the rules for borrowing from the plan. Often, they will only let you borrow a portion of the retirement money depending on how you are vested.
6) Trim your monthly budget and bills
Take a close look at your monthly expenses and identify areas where you can cut back. Review your budget and eliminate unnecessary expenses. Consider downsizing your cable or streaming subscriptions, dining out less frequently, or finding more affordable alternatives for certain services. It’s easy to forget that you are subscribed to monthly services that you don’t use anymore, so that’s a good place to check.* A review of the money coming out of your account could save you money that is essentially being wasted. Redirect the money saved towards your down payment fund.
*Bloggers note: While writing this blog I discovered I still had a subscription to Apple TV…and so does my wife.
7) Move in with parents or in-laws
Ok, stop rolling your eyes. This might work and remember – it’s very temporary. If feasible, moving in with your parents or in-laws can save a great deal of money very quickly. Not paying rent adds up fast, and all of that can be applied to your down payment savings account.
8) Downsize your car
Sometimes that car you fell in love with a few years ago doesn’t make sense anymore. If you have to choose between a cool car and living in your own home, it might be time to evaluate your transportation expenses. By opting for a less expensive car, or even exploring alternative transportation (public transit or cycling) , you can free up a lot of extra cash each month.
9) Pay off or consolidate credit cards
High-interest credit cards can hinder your ability to save for a down payment. Prioritize paying off or consolidating your credit card debt to reduce monthly interest charges and free up more money for savings. Explore options such as balance transfers or negotiating lower interest rates with your creditors.
10) Improve your credit score
That might not sound like a “savings” strategy, but it is. With a higher credit score, mortgage lenders are more likely to give you a loan with a lower down payment and lower rates on the loan. That puts your overall goal closer.
Because credit scores and reporting are dynamic, it’s a good idea to track the latest trends. For example, there was good news last year because people with lower credit scores are now allowed to include their on-time rent payments to the credit agencies to improve their credit scores. That means your rent can now give you a higher score.
How much can that help? TransUnion did a study back in 2017 that showed that the average increase in credit score was 16 points when rent was included. That’s the average, but the increase was a lot more for people with credit scores below 620.
If you need to improve your credit score, here are some tips for repairing or improving a poor credit score.
- Remove any errors or inaccuracies from your credit history report. The three credit reporting companies have online dispute forms:
- Pay all of your bills on time (early is better)
- Keep your credit card balance under 30 percent of your available credit limit
- Only open a new line of credit if you intend to use it over the long-term
- Don’t close existing lines of credit, even if you don’t use them
Some of these strategies will pay off right away, but some may take time. Increasing your credit score takes hard work and discipline. And it’s a marathon, not a sprint.
11) Side hustle
Consider taking on a side hustle or second job to supplement your regular income. Whether it’s freelancing, Uber, DoorDash, or selling handmade products on Etsy, a side gig can generate additional funds that can be dedicated solely to your down payment savings.
12) Dedicated down payment account
Open a separate savings account exclusively for your down payment funds. Keeping the money separate from your regular checking account will reduce the temptation to spend it on other things. When you set up the automated monthly savings account (Tip #2 above) make sure the money goes straight into this dedicated account. It also allows you to track your progress more effectively and see how close you are to reaching your down payment amount.
13) Matching savings plans
We found this the other day and it surprised us. When we were looking at down payment assistance programs, we found this one from the FDIC (of all places). These savings matching programs provide matching funds from the government so you can save toward your down payment. The FDIC program offers Individual Development Accounts that match your savings over time. The matching plan can take between 12 and 36 months to complete, so if you are in a hurry, this might not work.
Saving for a down payment requires discipline, dedication, and a well-thought-out strategy. By automating your savings, knowing your target amount, and implementing other tactics such as trimming your budget, improving your credit score, and exploring additional income streams, you can accelerate your savings progress. Remember, every dollar saved brings you one step closer to owning your dream home. Start implementing these tips today and make your homeownership dreams a reality.
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