Saving for a Down Payment

Saving money for a down payment can feel impossible. Even for an FHA loan, the 3.5% down payment requirement for a $200,000 house is $7,000. That’s one of the smallest down payments you will need.  For the same house with conventional financing and a 20% down payment you would have to save $40,000.  Fortunately, there are many ways to start a savings program that will pay dividends for you when are able to purchase a home. An added benefit is the habits you develop saving for a down payment work just as well saving for a car, college, or a great vacation. So, let’s get started.

How Much Do You Need?

With the FHA example from earlier, it’s clear that $7,000 is a mimimum amount for homes in Sonoma County.  It’s likely that the house you want might require more money down. I encourage you to find a lender to work with right away.  Begin your search for a lender at your regular bank. They already know you and will typically work effectively with you to start a savings program to save for a house. Most banks in this area have competitive rates for mortgages.

As I mentioned earlier, if you qualify for a FHA home loan, you can purchase a house with as little as 3.5% down. Some lenders with different mortgage programs will allow a down payment as low as 5% of the purchase price of the home. The strongest buyers put 20% or more down, since at that level lenders will not require you to purchase Private Mortgage Insurance (PMI). PMI can add significantly to your payments each month and provides you no direct benefit. It’s an additional cost that protects the lender in the event of your default. Work with your lender to determine what amount will be best for you.

Three Steps to Saving Success

  • First, determine how much you want to spend on a home. I recommend as a first step that buyers get prequalified to see what mortgage program best works for you and what home values you should look for. Once you’ve determined the total home price that fits in your budget, you’ll know the amount you’ll need to save for a down payment, and you’ll be able to start looking at homes in your price range to start tracking the market.
  • Second, set a date to buy a home. You may need to allow several years to give yourself enough time to save a significant down payment. You’ll need to save money for a down payment and also for closing costs and monthly mortgage payments.
  • Third, review your budget. A budget review includes developing a budget and planning how much to save each month. It includes a careful analysis of your assets and liabilities. When analyzing assets, don’t overlook any source of funds. You may have certificates of deposit, stocks, mutual funds, savings bonds, or other assets you haven’t considered. Penalties apply if you dip into retirement funds, but a tax advisor can help you with planning.

Save More, Spend Less

Every financial advisor will make the same recommendation:

  • Pay Yourself First. Saving has to be your first priority. Set aside money every month. I encourage you to set up a separate savings account. Consider your savings account untouchable until you use it for your down payment.
  • Don’t Look at the Money. Transfer a fixed amount to your savings account each month via direct deposit.  If you never see the money, you won’t miss it.
  • Get Thrifty. Give up Starbucks. Stop going to a nice lunch place very day. Cut back on luxury food items. Learn to do more with less. If you keep your old lifestyle intact, you can’t create a good savings habit.

Make More

  • Work more hours. Consider working overtime to cover your savings goal.
  • Get a second job.
  • Become a consultant to make extra money.
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