Saving enough money for a house down payment is not the simplest of tasks, especially in a hot real estate market like the one we’re currently witnessing. I just recently bought my first apartment, and the experience was daunting, to say the least. But looking back, I realize how little I knew about what it takes to own a home.
Initially, I believed that I would never be able to afford a home. A 20% down payment seemed way out of reach. And I bet a lot of people feel the same.
I’ll therefore share some tips and tricks on how to save enough money for a house down payment fast.
In This Article
- The 20% Myth
- So, how much do you really need to save for a house down payment?
- How much home can you afford?
- Then, there are closing costs.
- Finally, how do you save money for a house down payment?
- 1. Living for (almost) free
- 2. Save on commuting.
- 3. Save on food.
- 4. Skip the one vacation
- 5. Save less for retirement
- 6. Save money first/ Automate your saving
- 7. Track your expenses
- 8. Ask for a raise
- 9. Pick up a side hustle
- Conclusion on how to save for a house down payment
The 20% Myth
Did you know that you don’t actually need a 20% down payment to buy your first home?
Well, you do need a down payment, but not 20%.
A 20% down payment is only a rule put into place by mortgage lenders to reduce risks. If a borrower has less than the 20%, they’re just a riskier borrower and must find more collateral or pay monthly mortgage insurance.
But this should not stop you from getting a mortgage. Mortgage insurance payments are trivial compared to the benefits of owning a home.
My advice: Pay mortgage insurance so you can put down less money.
So, how much do you really need to save for a house down payment?
Depending on your location, you could be eligible for first-time homebuyers grants and programs.
In some states, you only need a 3.5% down payment to qualify for an FHA loan. Of course, there are other restrictions tied to such loans; for example, you have to live in the house for at least one year. The most important thing is that you get a mortgage with the least possible amount of down payment.
In some EU countries, first-time homebuyers only need a 5% down payment to get a mortgage.
If you research your country or state’s laws, you might find that you could save a lot on the house down payment.
How much home can you afford?
To get the exact amount you need to save for a house down payment, you need to determine how much home you can afford. Can you afford the monthly payments for a 500k home, including mortgage payments, property taxes, and home insurance? How about a 400k or a 300k house?
The best way to find out how much house you can afford is to contact a lender. They’ll let you know if you qualify for a mortgage and how much money you can get for the mortgage.
They’ll check your income for the last two years, your credit score, and your debt-to-income ratio (DTI).
Tip: Contact three or four lenders and compare their offers to get the best deal.
Once you know how much house your income can afford to maintain, you can calculate the down payment you need.
Then, there are closing costs.
In addition to the down payment, be prepared to pay between 2%-5% closing costs. Don’t let this scare you. During negotiations with the seller, you can ask them to pay for the closing costs.
Finally, how do you save money for a house down payment?
Now that you’re sure you can qualify for a loan and have an idea of how much you need for the house down payment, here are some strategies to help you save the money.
1. Living for (almost) free
If you’re currently renting, there are several ways you can reduce your housing costs.
If you can save only $300 on your rent, it would be a total saving of $3600 in a year.
Saving on rent is a FAST way to save for a house down payment.
Here are some ideas on how to do it:
- Rent out a spare room(s) to a roommate or friend. The rental income will pay a considerable part of your rent.
- Move in with a friend, roommate, or boyfriend/girlfriend and share the costs. This is precisely what I did to save on housing costs.
- Move to a cheaper house or apartment. Don’t worry about the downgrade; it’s only temporary until you can save enough for a home.
- Move back to your parents’ place if possible. It’s essentially a free place to stay. Again, it’s only a temporary move. Stay focused on your goal – which is to get your own home as soon as possible.
2. Save on commuting.
Commuting is yet another FAST way to save for a house down payment.
When the pandemic hit in March 2020, many people, including myself, were forced to start working from home. I quickly realized that I was saving a lot just on fuel expenses.
It also dawned on me that I could save much more if I entirely paused my car insurance and road taxes. Furthermore, the car no longer needed its yearly inspection and maintenance.
If you work from home, you can get rid of all your car expenses.
For couples and families with two cars, this is a chance to get rid of one and save a lot of money.
If you still have to commute to work, consider the cheapest ways to get there. Could you use public transport or can you cycle to work?
Considering that there might be situations that force you to own a car, getting a used, cheap, and reliable car is a good idea. It will reduce or eliminate your monthly car payments, and your only costs will be fuel, insurance, and maintenance.
3. Save on food.
Even though meals at the office restaurant are cheaper than regular restaurants, I still saved a lot of money in 2020 by having my lunches at home. In fact, most of my meals were homemade since lockdown restrictions affected restaurant opening hours.
To be able to save more money fast towards your house down payment, reserve eating out for special occasions only.
Also, drop your daily Starbucks for homemade coffee. If you can save $15 every week on coffee, it sums up to $780 savings a year.
4. Skip the one vacation
Vacations are costly. The average vacation costs $1145 per person.
Skipping this one vacation can add a significant amount to your savings for a down payment.
I know that this is a huge sacrifice to make. But be strong and remember it’s not permanent. It’s just a one-time sacrifice that will help you save for your house down payment really fast.
Or you can choose a staycation instead. Thanks to lockdowns, 2020 was the year of staycations. And it’s precisely what I did. Instead of an expensive holiday, I decided to enjoy nature on the outskirts of my city. It was a relaxing break, home away from home.
5. Save less for retirement
Saving for retirement is essential. I am therefore not suggesting that you stop making your contributions, nor am I implying that you liquidate your retirement investments.
There are two ways you can go about this strategy.
The first option would be to save a bit less for a year and redirect it to your down payment.
The other option would be to pause your contributions temporarily until you buy your home. This will enable you to save for that down payment real fast.
Important: Remember to get back to your usual retirement savings.
6. Save money first/ Automate your saving
Ever heard of the saying ‘Pay yourself first’?
It’s a strategy that prompts you to save money as soon as you receive your paycheck, so the money is long gone before you can be tempted to use it for non-important things.
Even better is automating the saving. You can set up an automated transfer from your checking account to your savings account. This way, you don’t have to remember to save.
It’s an excellent tip for whenever you want to save money for any financial goal, not just for a house down payment.
7. Track your expenses
Knowing exactly how much you earn and, more importantly, how much you spend puts you in the driver’s seat of your finances.
You’ll be able to adjust your spending so you can spend less and spare a couple of hundred dollars a month to go towards savings for a down payment.
You can use easy tracking tools such as YNAB and Mint to make it effortless. The best thing about these tools is that they allow you to connect your checking account and credit cards. They’ll then categorize every spending and create a report at the end of the month.
8. Ask for a raise
Reducing spending is not realistic for everyone. If that’s the case for you, increasing your income could be a better alternative.
One way to increase your income is to ask for a raise.
Asking for a raise can be nerve-wracking. However, if you don’t ask, the answer will always be no.
Before approaching your employer, make sure you’re well prepared for the negotiation. Gather all information about your performance and recent successes. It will help your employer realize how important you are to the organization.
Your attitude should also be exemplary. Be enthusiastic and confident. Let your employer know that you’re willing to grow and take on more responsibilities.
9. Pick up a side hustle
Got some extra time in the evenings or after work? Pick up a side hustle.
If asking for a raise at your current job is not an option, use your spare time to work a second job, run a side business, or do freelance jobs.
With work marketplace websites like Fiverr and Upwork, it’s now easier to make money online in your own free time.
Do you like writing, photography, or video editing? You can use any of your skills to help businesses and individuals achieve their goals, and in turn, get well compensated for it.
Remember, rich people don’t sleep 8 hours a day! That’s already a quarter of your life!
Conclusion on how to save for a house down payment
To be able to save for a down payment, you must have a plan in place.
1. Start by finding out how much home you can afford. In other words, how much in monthly payments are you able to put towards housing expenses. Housing expenses, in this case, include mortgage, insurance, utilities, taxes, HOA fees, and any other housing costs.
2. Next, find out how much you need for the down payment. Contact your lender to find out how much mortgage you’re eligible for. A lot of people believe that a 20% down payment is a requirement. However, if you’re a first-time homebuyer or qualify for an FHA loan, you only need 3.5% for a down payment.
3. Once you know how much you need, feel free to use the strategies mentioned earlier to help you save enough for the down payment of your dream house.
All the best!