Owning a house is the biggest dream that many people have. It is a good investment, and it offers stability that renting cannot offer. Local mortgage lenders can provide finance to realize your dream of ownership But buying a house requires a substantial amount of funds for making a down payment. Many potential home buyers find it challenging to save enough money for a down payment. The topic of saving money is tricky because so many variables are involved.

If you are one of these people who would like to buy a house in the future but don’t know how to save money for a down payment, then this article is perfect for you. You will learn a practical way to save money for a down payment.

How much should you save for a down payment?

Preparing for the future is very important, especially if you want to secure your family’s financial condition in the long term. Before setting a goal of saving money, it is best to know how much you should save for a down payment. This amount can be substantial because it can make or break your plan of buying a house.

According to the ​Department of Housing and Urban Development​ (HUD), they recommend you make your ​down payment of 20 percent of the purchase price. But nowadays, local mortgage lenders accept 10 percent or less as a down payment. But with a lesser down payment, you have to pay an extra cost for private mortgage insurance. Different loans offer different down payment options. First-time homebuyers can choose from several Texas mortgage loans options for a manageable down payment.

  • An FHA loan requires borrowers to make a down payment of as low as 3.5 percent of the purchase price.
  • A VA loan and USDA loans require no down payment at all. (Refer to the guidelines for qualifying for a VA and USDA loan.)
  • Both conventional and jumbo loans require a minimum down payment of at least 10 percent.
  • A fixed-rate conventional loan requires a down payment of as little as 3% of the purchase price.

You can qualify for any mortgage loan type depending on your credit score and income.

When you first start looking for a home, the first few questions that come to your mind are how much can I afford? What type of home should you buy? But, of course, the answer to this varies from person to person. Many types of houses are available today, from small condos for first-time homeowners to large mansions. The decision on which place you should buy depends on your personal preference and financial condition. If you want to buy a house that needs a reasonable down payment, then a condo or a townhouse is best for you.

After deciding on the type of house and the mortgage, you qualify you will be able to get a realistic picture of what your down payment could be by using a mortgage calculator.

How to save for a down payment?

Now, as you know how much you need for a down payment, the next question that might come to your mind is how do you save money for a down payment? In addition to saving for a down payment, do not forget to budget for closing costs and other expenses such as house inspections, property taxes, etc.

A down payment can seem very difficult to save for, especially if you do not have a regular source of income. But this does not mean that you cannot own your dream house because of it.

There are several ways how to save money for a down payment. Here are some of these:

Budgeting:

Create a budget and learn how to manage your finances effectively. This may not sound easy, considering that most people have tons of expenses every month, but it doesn’t mean you cannot do anything about it. The first step is to prioritize and make up a list of the things you need and those you can do without. Based on your bank and credit card statement, you will get an idea of your monthly spending on fixed (necessities) and variable (nonessential) expenses. Categorizing your payments will help you to cut back on unnecessary costs. Follow a 50-30-20 budget where 50% of your salary is reserved for essential, 30% is for wants (luxury), and 20% is set aside for savings. You can also use the “envelope method,” where you put cash in an envelope every month to save up for your down payment. It may not be possible to save thousands of dollars overnight but keeping even $100 a month will help you make significant progress towards achieving your dream of owning a home.

Savings account:

Opening a savings account is another good option to save extra cash. This way, you will not be tempted to spend the extra dollar in your wallet every time you purchase. You can set up automatic transfers from your checking account to your savings account every time the balance reaches a specific limit. Different types of accounts offer different interest rates on your money. A high yield saving account will help you save a considerable amount of money for your down payment.

Boost your Income:

Even after creating a realistic budget, it may be difficult to allocate enough money for savings. In such a situation you can try to earn more. Though this may sound difficult, there are ways to do it without too much effort and time. For instance, if you have an additional room in your apartment that is not being used, you can rent it out for extra cash flow. You can also work overtime, look for part-time jobs, pay surveys, or start a side business to boost your income.

Another way to save money is by asking for a raise at your current job. You will find these extra efforts fruitful when your dream of ownership becomes a reality.

Downsizing and cutting on expenses:

Downsizing is the fastest way of saving money by reducing your expenses and leading a simple life. If you cannot afford your apartment rent, move into a smaller apartment in a more affordable area. Asking your landlord to lower the rent is another option. You can also downsize by cutting on luxury such as selling off an extra vehicle, quitting unhealthy habits, skipping on vacation, movies, restaurant dinners and fast food, subscription, trendy clothes, etc

Clear off your debts:

If you have debts, especially credit card debt, it may be advisable to clear off these before going ahead with a down payment. When buying a home, your loan eligibility will depend on the total monthly outflows from your salary after clearing all dues such as rent, groceries, and utilities. The debt-to-income ratio is the first option that mortgage lenders look for. You can lower your debt by opting for low APR credit cards, avoiding cash advances, and using credit cards for transactions involving high interest.

Start an Emergency Fund:

Every homeowner needs a safety net to fall back on in emergencies such as a house repair, medical treatment, dental bills, etc. An emergency fund will help you overcome the unexpected expenses that may arise during your down payment process. You can start an emergency fund by putting away a small amount every month into your savings account.

Conclusion:

Depending on where you live, owning a home is not an easy task. But if you are determined enough and follow the above simple ways, saving money can help you achieve this goal earlier than expected.