7 Tips to Save for a House Down Payment

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7 Tips to Save for a House Down Payment

When my husband and I first got engaged, we set the financial goal that I would save for our wedding while he would save for a house down payment since his income was higher than mine. We were pretty frugal, and I lived at home rent-free (thanks, mom and dad) until I married. In that time, I worked a part-time and full-time job, paid down my credit card debt, and saved for our big day. When we got married two years later, I had saved a good amount of money that my parents matched for the wedding day.

Meanwhile, my fiancée kept saving while paying rent. Once married, we settled into an affordable and cute apartment that was a commutable distance to both our full-time jobs. Fast forward a year later, and we unexpectedly ended up purchasing our first house due to a job relocation.

In the real estate market in our area, at that point, a rent payment was about the same monthly amount as a mortgage payment. The big difference between the two was the recommended 20% down payment vs. the first month, last month, and security deposit needed for a new rental.

We didn’t want the nice build-up of home equity to benefit someone else, so we took a leap of faith and got prequalified for a mortgage. We found an affordable house that we bought with a 10% down payment because we agreed to primary mortgage insurance (PMI). We were fortunate our credit scores were high enough to qualify us for a mortgage with PMI and a decent 30-year mortgage interest rate. We carefully watched our equity and removed the PMI as soon as possible since it’s an extra expense that does not lower your loan balance.

We are on our third house now, but the steps we took to save for the down payment helped us build that initial equity that we have rolled over into the following two homes. Although we had to build our deposit quickly, and it was less than we would have liked, we used definite steps that would have helped us save the standard 20% with a little more time.

Since buying a home is likely the biggest purchase of your life, it is best to start with a plan to stay on track and make it attainable. The financial cost-cutting steps are temporary and will help you attain your goal of homeownership. So, where to start?

7 Tips to Save for a House Down Payment

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7 Tips to Save for a House Down Payment

1. Create Your Emergency Fund

If you do not have an emergency fund of at least six months of expenses, you are not ready to start saving for a house down payment. The standard rule of thumb used to be 3 to 6 months of expenses. However, suppose you have a job in a volatile field greatly affected by downturns in the economy (or a pandemic). In that case, you should aim to have 12 months of your essential monthly expenses saved in a liquid form like a savings account or a CD. This is not “mad money.” It is to help cover unexpected job loss, illness, and expenses that are genuine emergencies that you can not pay out of your regular budget. If you have to take money out of your emergency fund, you must add it back as soon as possible.

2. Create a Budget

It is hard to figure out what you can save if you don’t know your expenses and take-home pay. That is why creating a budget is an essential part of saving for a mortgage down payment. A 50/30/20 Budget Plan is a great place to start. This basic budget allows 50% spending on needs, 30% spending on wants, and 20% savings. The 20% intended for savings should first fund your emergency fund and then build your mortgage down payment. Once you crunch these monthly budget numbers honestly, you can determine what you can save for a down payment. Be realistic if you want to be successful at sticking to your plan!

3. Investigate mortgage options 

Now that you’ve done the math and arrived at your monthly budget, how do you determine the price range of what you can afford? You can start with a general mortgage calculator to help you estimate how high of a mortgage you qualify for and let you experiment with different loan terms and adjustments. For a more personalized picture of your options, schedule an appointment with a mortgage loan officer. That is a necessary step if you want to get pre-approved for a mortgage! You will need to obtain a pre-approval letter from your bank or mortgage company.

A mortgage loan officer can determine if you qualify for state or local homebuyer programs too. These unique loan programs help low-income or first-time homeowners purchase homes by offering reduced down payments or credits. For instance, the city of Boston provides no-interest loans to help with house down payments, but eligibility requirements must be met.

Although down payment assistance sounds terrific, there are financial benefits to putting down the recommended 20%. If you put down less than 20% on a conventional mortgage, you may be required by your mortgage company to purchase primary mortgage insurance (PMI). PMI protects the lender if you default on your mortgage. PMI insures the lender, but you pay the insurance payment. It will increase the cost of your mortgage payment until you reach 20% equity.

When my husband and I purchased our first home with only 10% down, we were required to have PMI. We carefully watched our equity build and removed the PMI as soon as we hit 20% equity. Be sure to keep PMI in mind when budgeting if you intend to put down a smaller than expected down payment.

 4. Determine your house down payment goal 

Once you know what size mortgage you will qualify for, it’s time to get out the calculator. You know how much house you can afford, so it’s time to do some math to get the down payment figure you need to save. If you qualified for a mortgage of $360,000, you would be able to buy a home that costs $450,000 since the down payment is 20% of the home’s total cost. Your down payment goal would be $90,000.

Down Payment Chart (Source: Christine Seaver)

5. Establish a savings timeline 

Now with your monthly budget in hand, examine how long it will take to reach your goal. Divide the down payment goal by your monthly savings number to find the number of months to reach the total needed. For instance, if you wanted to save $90,000 over 120 months (ten years), you would need to save $750 a month. Don’t get overwhelmed if it seems it will take forever!  Your timeline may change if your budget and income do.

5. Automate savings

Arrange automatic deposits to a dedicated down payment savings account to make it easier to build your down payment. You won’t miss the money if you don’t see it in your checking account. The automatic contributions will help your money grow. You can even transfer unexpected money like tax returns, inheritance, and bonuses into this account. Remember, the unexpected money is not part of your budget!

6. Add increases to your income to your house down payment

Did you get a raise or a promotion? Take those unexpected monthly funds and put them right in your down payment account! You can also increase your income with a part-time job or side hustle. It’s a great chance to get creative, use your skills and passions, and create a new part-time business, online shop, or service. 

Got stuff? Unload some of the clutter through apps and local online social media groups to boost your savings. If generous family members offer you cash gifts to meet your goals, deposit them in your dedicated account. They may even qualify for a gift tax break.

7. Reduce your spending 

Reducing your spending is a fantastic way to increase your savings. Prioritize paying down high-interest debt to free up some savings and track your discretionary spending using online banking or a budgeting app. Watching where your money goes allows you to see patterns and areas you can decrease spending. Take a break from your non-essential subscriptions, such as streaming services or meal deliveries, and deposit the savings. It’s also a great time to check the rates of your car insurance, renter’s insurance, health insurance, cable, internet, and phone plan to look for possible deals or discounts, especially if you have been a customer for a long time. You may not be getting the best rates!

Two different methods of paying down debt are a debt avalanche and a debt snowball. The primary difference between the two methods is what type of debt you pay off first. Using the debt avalanche method, you pay off the highest interest rate debt first while paying the minimum payment on the other debts. With a debt snowball, you pay the smallest debt down first while making minimum payments on the rest of your debt. Once the smallest debt is paid with each method, you take that payment amount and add it to the next debt.  Reducing your debt-to-income ratio can impact portions of your buying process, including your credit score, so be sure to keep your mortgage officer in the loop about any changes to your finances during the process. 

Although it takes discipline and sacrifices to cut back on non-essential purchases, it will help you attain your long-term goals. Along the way, you can treat yourself as you reach your goals. Just remember to include it in your budget. Steady progress will add up to a nice-sized house down payment.

Thanks for reading 7 Tips to Save for a House Down Payment!

You can also read Roth vs Traditional IRA by Christine Seaver.

Author Biography: Christine Seaver is a freelance writer that writes about personal finance, budgeting, and debt. She works as a bookkeeper by day and a cookie baker at night. Hobbies include gardening and watching her chickens.

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