Beating the Odds

Having trouble saving money for your first house? Need to know what steps you can take to begin a savings plan?

How To Best Save For A Down Payment On A House

When buying a house, offering a big down payment can save you a lot of money in the long run. Here's how to save for a down payment the smart way.

Step 1: Figure out how much you’ll need to save

Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for.

Generally speaking, your housing expense should not exceed 28% of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment. The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any.

Step 2: Determine your timeframe

The next step is to determine your timeframe. If you plan on purchasing a home in five years, you’ll have to be prepared to save $______ per year. So, if you plan to put down 20% as a down payment, and the home you’re looking to purchase is roughly $250,000k, you will need to save a total of $50,000.00 which equals $10,000.00 each year, for the five years.

Naturally, the shorter your timeframe is, the higher your annual savings goal will be.

Step 3: Find the best way to save for your down payment

As a rule, since the money that you are saving for the down payment on a house has a definite purpose, and needs to be reached within a specific timeframe, you should not save money in risk-type investment vehicles (stocks, realestate investment trusts, ests.) Instead, you should save your money in super-safe vehicles like a boring old savings account or a certificate of deposit.

Step 4: Make room in your budget

Since we’re talking about saving thousands of dollars per year, you have to clear some room in your budget to make sure that your savings goal is doable. That means you may have to earn additional income, cut back on expenses, or both.

But, making room in your budget can help you save the kind of money you’ll need for your down payment, and it will also prepare you for managing the type of tighter budget that homeownership requires. Embrace it for all it’s worth!

Step 5: Set up an automated savings plan

Unless you’re a saver by nature, and most of us aren’t really, you’ll need to automate the savings process. That will mean some sort of payroll savings plan. Just like your 401(k) plan, you should allocate a certain percentage or dollar amount of your regular pay to go directly into a savings account or money market account dedicated to accumulating the funds for your down payment.

Not only does this make the process automatic, but it also makes it invisible. Money moves from your paycheck to your dedicated savings account without you even seeing it happen. That will remove both the temptation and ability to spend the money on other purposes.

Step 6: Bank those windfalls

You can make the process of saving money for a down payment on a house easier—or even shorten the process—by banking periodic windfalls. These can include income-tax refunds, gifts received, bonuses or large commission checks, or even the sale of personal assets.

By depositing these funds into your down payment savings account, you fast-forward the process of saving money to buy your future home. Regularly depositing a few thousand dollars per year in windfalls can chop a couple of years off of your savings timeframe.

Step 7: Build flexibility into your savings plan

Whatever the size of your down payment, it is important to build flexibility into your savings plan.

While you’re saving up money, there’ll be other demands on your finances. These can include major car repairs, replacement of a car, uncovered medical expenses, or even the temporary loss of a job. None of these will magically stop just because you have a goal of saving money for a down payment on a house. You’ll have to be ready when they happen.

Summing it up:

Small things, like setting aside a jar for loose change, selling household items on Facebook marketplace, making coffee at home, eating out less often, forgoing those new shoes - these monetary sacrifices can really add up over time, and get you to your ultimate goal of homeownership!

Check out www.outofyourrut.com