One of the most difficult aspects of applying for a mortgage to buy the home of your dreams is coming up with the down payment. There are tons of ways to save up for the down payment, and there’s enough information on this subject out there that it can be hard to sort the fact from fiction.
But, don’t worry. In this article we’ll teach you everything you need to know about how to save for a mortgage down payment.
The best thing about learning how to save for a mortgage down payment is that once you learn how to save to purchase your home, you’ll likely be able to apply these skills to purchase a car, go on vacation or pay off bills and debt.
If you’re learning how to save for a mortgage down payment, you may be one of the numerous people who believe they have to make a 20% down payment that you’ll never be able to afford. The good news is that most lenders don’t require you to make a 20% down payment anymore.
How much are down payments now?
It depends on your credit score and your income. But if you qualify, you could have a down payment of 3% or less. You can even get away with financing a home with no down payment if you qualify for a USDA or VA loan. (Check with your lender to find out if they offer these loans.)
The Myth of 20%
If down payment percentages are so low, why do so many people believe that they have to make 20% down payments? Well, it largely has to do with Private Mortgage Insurance, or PMI.
If you don’t have enough money to pay a 20% down payment, you’ll likely have to pay for Private Mortgage Insurance to protect both you and the lender in case you default on the loan. While it’s true that having enough money to make a 20% down payment would save you money over time, it’s not a requirement.
How much home can you afford?
If you’re learning how to save for a mortgage down payment, you should start by figuring out how much you can afford to spend on a home. After you run the numbers, you should have a good idea how much of a down payment you can afford to pay.
Now we get to the main event of this article: the section about how to save money for a mortgage down payment.
Here are several useful tips for saving money for your down payment:
If you’re learning how to save money, then it’s vital to create a budget. If you have no idea where your money is going or how much is coming in, then you can’t properly divert the funds to your savings.
The first step is to gather your bank and credit card statements and determine where the majority of your money is being spent. During this process, you’ll need to determine how much money is being spent on necessities like groceries, bills and rent, and how much is being spent on nonessentials.
You can easily use a budget app to do the calculations for you.
Once you’ve categorized all your spending habits, you need to find out which spending habits you can eliminate. The toughest part is setting and adhering to a budget for each spending category.
It needs to be strict, but realistic so that you don’t go without things you need, but also avoid frivolous spending. You should remember to set up a category and budget amount for how much you should put towards your savings each month, and consider this a necessary monthly expense.
One of the easiest techniques you can use while you’re learning how to save for a mortgage down payment is downsizing. This is a practice of living below your means and cutting expenses while you’re saving up.
Downsizing reduces the cost of necessary expenses, and allows you to put the money you save on necessary expenses towards your savings.
Examples of downsizing include moving to a smaller apartment, selling a vehicle, or moving to a more affordable area. This is something that many people do when they’re saving up for something, and even if it seems unthinkable right now, you may actually find that you enjoy the simplicity it brings after a while.
This is another great tip for how to save for a mortgage down payment. If you cut out or reduce how much you spend on just one bad habit, you’ll likely save hundreds of dollars per year.
If you’re an impulse buyer, then you could cut back on your online and impulse purchases. To do this, you should unsubscribe from newsletters and apps that notify you of sales and try to get you to buy things.
By cutting back on impulse buys, you’ll not only save money but reduce the amount of clutter around your home, which is something you’ll want to do to make packing for your new home easier as well.
If you’re prone to ordering takeout, then you should cut back on this expense. Takeout may give us easy access to food, but it’s expensive. Instead of takeout, cook at home a few nights a week.
One thing you can do when you’re figuring out how to save for a mortgage down payment is ask for a raise. This is most helpful if you notice that you barely have any money left over after you’ve paid your bills and done all of your necessary spending for the pay period. Here’s how to do it right:
You have to get the timing of this conversation right. Don’t ask while there’s a big project going on. The ideal time is during your annual performance review, but the weeks after a big project completion will do, as well.
Come to the conversation prepared with numbers. Let your boss know exactly how hard you’ve been working, the hours you’ve worked and what you’ve been doing, as well as any performance statistics from your work that you can get your hands on.
It’s important that you have a winning attitude during the discussion, which means you need to be a combination of confident and grateful. Let your boss know that you’re grateful to have the opportunity to grow with the company, and show enthusiasm about the new responsibilities you want to take on.
Another option you have while you’re figuring out how to save for a mortgage down payment is to look for a better paying job.
Look at salary comparison sites to find out whether you’re making as much as people in similar roles, and check out job boards and help wanted ads. If you’re not making as much as other people in the same field are, then you could use that information to get a raise.
But if you can’t get a raise, then you can use the job boards and help wanted ads to get a better- paying job.
This probably goes without saying, but if you’re thinking about how to save for a mortgage down payment, then it’s probably not a good time to go on expensive vacations.
Instead, you could consider a staycation, and check out local events, historical venues, have a spa day, or check out something like a cooking or painting class.
Another easy solution for anyone contemplating how to save for a mortgage down payment is picking up a side gig. It’s easier than ever to get side gigs with the advent of things like Instacart, rideshare services and TaskRabbit.
You can also find freelance work online, petsit or walk dogs, or test apps and websites with things like Testbirds or UserTesting.
If you’re learning how to save for a mortgage down payment, it may seem silly to put money towards paying down your debt, but one of the factors that most lenders check out is your debt-to-income ratio (DTI).
The more debt you have, the higher the interest rates you’ll have to pay and the bigger the down payment you’ll be required to make.
Take some time to find out how much debt you have and then start paying it off before you apply for a mortgage.
Saving up for a mortgage down payment may seem like a daunting task, but it doesn’t have to be. If you follow the tips we provide in this how to save for a mortgage down payment article, you’ll save up enough money to make your down payment in no time!
Don’t forget to pay off things like your credit card and student loan debt to reduce your debt-to-income ratio and get yourself a lower down payment.
Make your money do more.
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Yes, many banks offer the option to automate savings. You’ll need to find out how much you want to save for your down payment monthly, then call your bank and ask them to take that amount and put it in your savings account monthly.
Yes. In fact, you don’t have to keep a permanent room mate to make this work. You could rent out space as an AirBnB. If you choose to rent out your room on a monthly basis then you could list your room on roommates.com.
If you’re saving for a mortgage down payment, then the most efficient type of savings account for you would be a Daily Interest Savings Account (DISA).
If you make a down payment of 20% or more, you’ll get what is known as a conventional mortgage. If you make a down payment under 20%, then you’ll get what is known as a high- ratio mortgage and be required to pay for Mortgage Default Insurance, which will cost you more money in the long run.
One of the best tactics to prevent spending your savings when you’re learning how to save for a mortgage down payment is to maintain an emergency fund. Before you even start saving, make sure you have 3-6 months worth money laid back to cover necessary expenses in the event of an emergency.