If you are looking to buy a house of your own, then you will need to save up the money for a mortgage down payment. This is the cash that you bring to the closing table when purchasing a home. Although you may borrow money from the bank in the form of a mortgage or home loan, in most cases a portion of the money will need to come from you.
The higher your down payment, the less you will need to borrow to purchase your home and you will have smaller monthly repayments to make.
The down payment acts as a sort of insurance for your lender. Handing over money from your own account means that you are officially invested and more likely to make good on your mortgage payments year after year.
But, saving up money for a down payment can be difficult. Here are some top tips to help you meet your savings goal.
Some home loan can be financed through FHA that requires you to pay a less down payment. But typically, 20% will ensure a better rate and faster loan approval.
Moreover, if you don’t have 20 % to pay upfront, you’ll need to purchase private mortgage insurance, or PMI, which basically reimburses the lender if you default on your loan.
Mortgage insurance typically cost around 1% of the total loan amount, every year.
This 20% of your mortgage is not a small amount and you may not have it saved already. If you have the money saved already, this article is not for you.
So what you do?
You try to save the amount or borrow it from someone else or borrow it from your own retirement fund.
The first step is to absolutely work the numbers and figure out your budget. While this is not an actual savings tactic, it’s a crucial step in the process because it gives you a concrete goal to work towards.
Knowing this number makes it a real goal and clears up the confusion and vagueness of having some idea of some large dollar amount, that’s probably unattainable anyway.
Remember, half the battle is gaining mental clarity and setting the goal.
Step 1 – Calculate your net income each month, and then add up your expenses and monthly payments. Use a financial tool like PersonalCapital, that can give you income and expenses from all sources on one page. (see picture below)
Step 2 – Then use a home-buying calculator to plug in your numbers, and it will give you a better sense of how big of a home you can afford.
Zillow’s mortgage calculator is pretty helpful in helping you find this number.
Step 3 – To know how your potential creditors think you’re capable of handling, get pre-qualified. Do not look for a $500,000 home if you are pre-qualified for only $300,000. This is a reality-check step.
For simplicity’s sake, let’s say we did our budgeting and used the calculator to figure out that you can afford and qualified for a $500,000 home, so your down payment savings goal should be $100,000.
Now consider these tips to save up for mortgage down payment.
Tips to save money for mortgage down payment
1. Speak to a Financial Advisor
Speaking to a financial advisor will not only help you understand more about the right type of home loan or mortgage for you but also allow you to gain valuable advice on saving towards a down payment.
You can make an appointment with a financial advisor through your bank or speak to a Minneapolis financial advisor privately.
2. Determine How Much You Can Afford to Save for mortgage down payment
It’s important to take the time to work out and determine how much you will be able to afford to save each month.
Once you are agreed on a figure, set up a regular automatic payment from your checking account into a savings account.
You can then budget each month with the remainder of the money, rather than saving at the end of the month and risking overspending on your budget.
3. Work Out How Much You Need to Save
When it comes to working out how much you will need to save for a down payment, there are a few factors that you will need to take into consideration.
First of all, consider your overall budget for how much you are willing to spend on buying a house. This will help you determine how much you will need to borrow in the form of a mortgage or home loan.
In general, you should aim to spend no more than 25% of your monthly take-home pay on your mortgage repayment.
Use your budget for a monthly mortgage payment to come to a total mortgage amount, then work out how much of a percentage you should save for the down payment.
4. Don’t Forget the Other Costs:
Bear in mind that when you are buying a property, there’s not just the down payment to consider when it comes to costs.
You will need to budget for taxes, escrow, private mortgage insurance, appraisal and inspection fees, and closing costs to your lawyers.
This can all add up to a few additional thousand dollars before you can call the property your own. So, factor these costs into your savings, too.
5. Flesh out your savings plan with ‘bite-sized’ steps
Now you can start to plan how much money you should really put aside each month.
You’ll also get a better idea of how long it will take to reach your goal. If you’re on the five-year plan, that means you’ll need to save an extra $20,000 a year.
Don’t panic, just break it down further. An extra $20,000 a year is about $1,700 a month, which sounds way less intimidating.
Keep in mind you’ll still need to continue saving for your emergency fund, IRA, and paying down debt.
6. Earn extra money
You’ve heard this from me again and again: get a side gig, make extra money, work overtime, increase your income!
It sounds like generic advice but there’s a reason why experts dish out the same advice. Earning extra money is a lot easier than drastically changing your lifestyle to scrimp and save.
Going this route is just not realistic or sustainable. Pinching pennies is not going to get you closer to the $1,700 each month, but increasing your income will.
This is going to take research on your part, but it’ll be worth it — just imagine how you will enjoy your dream house, and what the extra income will afford you.
The best way to start is to make a list of what you’re good at, and if you can leverage and outsource those skills during your free time to make that $1,700.
7. Consolidate Your Other Debts
One of the items that your mortgage lender will look at is your overall DTI (debt-to-income) ratio.
If you’re carrying a lot of credit card debt, you might want to look into a personal loan to consolidate and lower your payment.
Not only does this help you eliminate debt faster, but it can help increase your credit score by up to 40 points according to Payoff.
If you’re able to reduce your monthly payment and increase your score, you’ll be in great shape to qualify for a mortgage.
8. Make it a rule that extra cash always goes in the ‘house fund’
Just like a concrete savings goal was determined ($100,000), name your savings account and bring it to life. You can call it a “house fund,” “dream house stash,” or the “no more apartment fund.”
After you establish that, any kind of extra money that comes in during the year goes straight into that fund.
This includes any bonus from your employer, tax refunds, Christmas bonuses, gifts, inheritances, lottery, gambling win, etc.
A 20 percent savings goal may be discouraging, especially if you have zero saved, but it can be done — all you need is a concrete plan and a savings mentality.
Other tips to save money for mortgage down payment
These are trusted methods to accumulate the down payment in the shorter term
- If you and your partner, both work, start to live with only one person’s salary. Save the other salary for a mortgage down payment. Move to a rural area, if you can. Move with another family to save on monthly rent
- Try to find alternative areas where housing is cheaper and your present savings allow for you to buy a home there, instead of the dream location you previously thought about.
- If you have two cars and your family can live with one car then proceed to the car sell can go to home buying fund. This may accelerate home buying
- Any bonuses you get from your employer would ease up a lot of pressure from you and your partner
- If you have valuable property elsewhere then sell it to arrange for mortgage down payment. This includes inherited valuables, foreign real estate, etc.
- Loan it from your parents or relatives. Usually, these loans come with 0% interest, make use of this lucrative offer if someone agrees to lend you money
- Look out for distress sale, foreclosed properties, where you need to put in very low down payment
- Putoff savings in your retirement fund for a couple of years. Redirect this fund to your home buying fund.
- Get a loan from your own retirement plan for mortgage down payment. This loan will come roughly at the same interest rate as your mortgage
- If all else fails, then go for mortgage insurance by paying only a small % of the loan, typically 5% only. But, be prepared to spend extra $100-$300 per month on mortgage insurance. You can start repaying the loan faster and as soon as cross the 20% ownership criteria, opt out of that insurance.
Start with determining how much down payment is required for your need, your credit, and home location. Then divide the number by the months you’re willing to wait.
Once you have the monthly savings goal, start by aggressively saving that amount from your monthly budget or increase side income.
You can also bring in additional money from selling some of your valuable stuff to reach your goal early. You can also consider lowering your goal by opting for a smaller home, different location.
If you fail in your goal, down pay a lesser amount and opt for mortgage insurance.
If you found these tips helpful, we’d love to hear from you in the comments!