Learning how to save a down payment for a house, and actually doing the saving may seem like daunting tasks, but with all of the loan options currently available, it may not be as complicated as it appears. That’s why we’ve put together a list of how to save up for a house down payment.
First, let’s start with the different types of loans you have available.
Types of Home Loans
- Conventional Loans
- FHA Loans
- VA Loans
By understanding if or where you fit into these loan programs you will be able to determine your down payment needs.
A conventional loan is considered to be the most secure form of a loan, as it requires an excellent credit score and is only available to those with excellent credit histories. These loans also require a hefty down payment, usually 20% of the sales price.
So, for a $400,000 loan, The buyer would need $80,000 for the down payment at closing.
When purchasing a home, most sellers prefer contracts with conventional financing, as they feel there is a higher chance of the loan going through successfully. In a bidding war, most sellers will favor a contract with a pre-approved conventional loan over one with FHA financing.
FHA loans are fantastic opportunities for buyers who may not have the 20% down payment available. There are a vast number of options and programs, some with down payments as low as 3%.
So, for that same $400,000 purchase, a buyer with an FHA loan would need a $12,000 down payment, which is much more manageable for most people.
All FHA loans require the homeowner to pay an additional charge of PMI which is rolled into the monthly loan costs. The PMI will increase your monthly payment.
PMI stands for “Private Mortgage Insurance,” and it ensures the loan against buyer default. PMI stays with the loan throughout the entire mortgage period, or until you have a minimum of 20% equity in your home. At that time, you may consider a refinance to a conventional loan product that does not require the additional cost.
The brave Americans who have served time in the armed forces may be eligible for a VA loan. Many veterans qualify for benefits both during and after their military service. Surviving spouses of veterans also may receive benefits. The actual benefit is determined by several factors, including the length of service and duty status, for example.
VA loans are provided through private mortgage companies and are backed by the government, often allowing lenders to give better terms than those in an FHA loan. One of the perks is that most VA loans do not require a down payment, so there is often 100% financing available for qualified veterans.
How to Save for a House Down Payment
Whether you choose the FHA or the conventional loan, there is still a chunk of money that you need to have in your bank account before the house hunting begins.
1. Just Say No to Extras
If you are starting from scratch, it may seem like an overwhelming process. Taking a firm look at where you are spending your money is always the best place to start so you can see where you can cut a few financial corners.
For example, you may love that coffee confection you purchase when the afternoon tedium of work hits, but do you realize how much that sugar and caffeine high is costing you? Say you pay $4.00, and you do this five times a week. Right there, that’s $20 towards your new home. Multiply that by 50 weeks in a year, and you just saved $1,000 towards your new house. This savings makes the break room coffee taste a little better, doesn’t it?
For those who like to go out to dinner on the weekends, or to have drinks with friends, consider what that may cost you. Again, if you conservatively say $75 per weekend and multiply that by 50 weeks, that’s $3750 in one year. Even if you only went out every other weekend, that would still save you $1875 towards your new home.
For those who like a new car every few years, contemplate keeping your car longer, or maybe purchasing a pre-owned vehicle. Buying a pre-owned car will save you thousands of dollars in depreciation that occurs the second you drive that new car off the lot.
According to Carfax, on average, a new car will lose over 60% of its total value within the first five years.
Every individual has specific things we purchase that may seem like necessities but aren’t. Looking carefully through your banking statements is a real wake-up call to the frivolous spending we all do, but may not even notice.
2. Use A Separate Savings Account
Lastly, all that money you are saving? Set it up in a separate savings account. Every week that you forego those pricey mid-afternoon coffee drinks, you should put $20 in the account and leave it there. Leaving the money in a regular checking account makes it too tempting to splurge a little here and there, and set you back.
3. Plan Rewards for Yourself
Plan some rewards to help make saving up more fun! After every $1,000 saved, treat yourself to dinner out, or something else you enjoy. Planning rewards for yourself may make you more eager to get that money saved and get you to the real prize – a home of your own.
Now that is a fabulous reward.