If you’re planning to buy a house in the next few years, now’s the time to think about your down payment.
Whether you’re considering an FHA home loan or a conventional mortgage, your lender will require a minimum down payment between 3.5% and 5% of the sale price.
As a first-time homebuyer, this could be your biggest obstacle to reaching the closing table. Even if you earn a decent salary and have an excellent credit score, it can be difficult to save for a down payment if you do not have disposable cash.
However, you should not give up on your dream to purchase a house. Here are a few down payment savings strategies that can increase your savings and help achieve your goal.
1. Know how much you need
You won’t know the exact amount of your down payment until you find a house. Even so, you can estimate how much you will need based on average home prices in your area. For example, if you’re looking to purchase a condo and local prices average $200,000, you will need to save between $7,000 and $10,000.
2. Set up a dedicated savings account
Open a savings account that’s specifically for down payment funds. To maximize your savings, look into online high-yield savings accounts. These accounts typically offer higher rates than regular bank savings accounts, which can help you reach financial goals sooner.
You can open an online savings account through American Express, Ally, Discover, CapitalOne 360 – just to name a few. Compare interest rates to make sure you receive the highest return on your deposits.
3. Reduce housing expense
Saving for a down payment can be challenging if your current rent payments take a chunk of your income.
If your lease is about to expire, move into a smaller, cheaper apartment. This frees up cash each month, and you can apply this savings to your down payment fund.
Another option: move in with your parents on a temporary basis or get a roommate to share expenses. Both options can slash your housing expense and increase your disposable income.
4. Lower other monthly expenses
Think of other ways to cut costs and save money. Reevaluate your budget to assess how much you spend on groceries, dining out, utilities and transportation. Simple adjustments to the way you spend can reduce your monthly expenditures.
For example, using coupons when grocery shopping and preparing your own meals at home can lower your grocery and entertainment costs. Canceling services such as cable and a landline telephone also frees up money. Rather than drive your car each day, could you walk, carpool or take public transportation to work?
5. Liquidate belonging
Saving up for a down payment requires sacrifice. If you have more personal belongings than cash in the bank, selling some of your belongings can generate extra money.
Go through your closets, attic or storage facility and pull out items to sell. Have a yard sale, take these items to a consignment shop or sell through online marketplaces, such as Craigslist or eBay. Items worth selling include furniture, electronics, clothes and extra vehicles.
6. Boost your income
This is much easier to say than do. However, even if you can’t negotiate a higher salary at work, there are ways to generate extra income. Let your employer know that you’re interested in overtime work. You can look for part-time work in the evenings or on the weekend, or do odd jobs to drum up down payment money, such as office cleaning, housecleaning, pet sitting or lawn care.
7. Borrow from retirement accounts
As a first-time homebuyer, you can take up to $10,000 from an individual retirement account and avoid the 10% early withdrawal fee. Additionally, there’s the option of borrowing cash from your 401(k) without tax or penalty. Typically, you can borrow up to half of your balance, up to $50,000. A 401(k) loan must be repaid within five to 15 years, depending on your employer.
Saving up for your first place can be challenging, but not impossible. It may take a few years to reach your down payment goal. But if you have a doable plan and make the necessary sacrifices, you can drum up cash to purchase a house.