Author: Shiloh Hicks
Putting money aside for a down payment is a big step toward becoming a homeowner. It is also the most challenging barrier for first-time home buyers. However, breaking the process into smaller, actionable steps may make it less complicated.
Even though saving for a down payment will likely take time, by using these tips, you may be able to reach your goal in a shorter time than expected.
Calculate the Cost of your Down Payment
A down payment is the upfront cash you must pay to get a home loan and are expressed in percentages. A common misconception is that you must make a 20% down payment for a mortgage. While 20% will enable you to avoid paying for private mortgage insurance, you don’t need to pay that much.
Depending on your credit score and debts, first-time home buyers can access several mortgage options. Also, each loan has its requirements.
Here are some loans you could qualify for:
- FHA loans: The Federal Housing Administration backs these loans, requiring as low as 3.5% down payments. However, the required down payment may vary by credit score.
- Conventional loans: You can make a down payment as low as 3% with solid financials. Also, the requirements may make it challenging to qualify for a conventional mortgage.
- VA loans: The U.S. Department of Veteran Affairs backs this loan and allows home buyers to skip the down payment. But they are accessible to current and former U.S. service members and qualifying spouses.
- USDA loans: Offered by the U.S. Department of Agriculture to people living in rural or suburban areas. Home buyers usually don’t have to make down payments with this loan.
Plan your Savings Budget
Once you’ve determined how much you need to pay as a down payment for your dream home, the next step is to plan your savings.
One helpful tip is to consider opting for an automatic transfer from your checking account to your savings account, this will make your saving less complicated.
You also want to put any extra money you get from a raise or tax refund into savings for your down payment.
Another tip would be to use a cashback credit card and put the cash back towards your down payment fund. But you also want to ensure you pay off your debt monthly to avoid high-interest charges.
Choose the Right Account for your Savings
When setting aside funds for your down payment, you don’t want to leave it in a checking account. You could deposit it into a high-yield savings account that pays more than 0.01% interest rates and is a good choice for short to mid-term savers.
Another option would be to deposit it into a money market account. These accounts are insured and offered by banks and credit unions, but you’ll need to research thoroughly to find one with decent returns.
It will take some time to save money for your down payment. However, if you take diligent action, it may not take as long as you think. By following the advice provided above, you could be on your way to becoming a homeowner sooner rather than later.