You can’t discuss how to save for a house until you have the funds to make your down payment.
It’s a challenging time to buy a home. If you’ve begun looking to buy in the last few months, this comes as no surprise. Prices are up in expensive markets and availability is down in affordable markets. Many are having trouble even saving enough to consider a new home.
Of course, the ebb and flow of the pandemic have a lot to do with this. As the phases of the pandemic change, so changes the real estate market. Homeowners fleeing the city saturated the market. Homeowners returning to the city push demand. And the ability for significantly more people to work remotely has turned the markets in secondary cities on their head.
And if you think it’s just you, it’s not.
It’s challenging to save for a house in today’s market
The statistics bear out the extremes the market is feeling. A housing update from Redfin this month highlighted the unprecedented shifts.
- Mortgage rates are up at the fastest pace in history, up over $500 a month just since New Year’s
- Median home sale prices are up 17 percent year-to-year to a record high
- Median asking prices for a new listing increased 15 percent year-to-year to a record high
- The median asking price for monthly mortgage payments rose 31 percent year to year for a record high.
- Median home sale prices ballooned by 6.2 percent month-to-month to a record high
This has pushed new home sale listings down 7 percent over the last year, with active listings down 22 percent to the fifth-lowest level on record. That’s not great news for the full third of all Redfin users looking to move away from their city, another record high.
And renters trying to buy a home are feeling highly discouraged by the real estate market. A third indicate they can’t afford to buy a home in their desired city, 30 percent are unable to save for a down payment for a house and 45 percent say their personal debt is a roadblock to home buying. Only 12 percent of renters report having the financial ability to buy a home.
So, with all that discouraging news, can you still buy a home right now? The first step is uncovering how to save for a house in any market conditions.
How much do I need as a down payment?
The first step in buying a new home is knowing how much you need for a down payment. Monthly installments and mortgages won’t mean a thing until you can afford a down payment. Understanding how your down payment works is the first major step in saving for a house.
Conventional loans
Most loans, typically in 30-year and 15-year varieties with a fixed or adjustable rate, require a minimum 3-3.5 percent down payment. But it can go as high as 20 percent and as low as zero. That’s a figure that changes depending on your loan type and situation. Most first-time homebuyers average a 6 percent down payment. Existing homebuyers average 16 percent.
The most common loan type is a conventional loan. It follows guidelines set by Fannie Mae and Freddie Mac, which are private agencies. Down payments on conventional loans are as low as 3 percent for a single-family home, but many lenders levy a 5 percent minimum.
Jumbo loans
Similar to a conventional loan is the aptly-named jumbo loan. It’s essentially the same as a conventional loan, with much larger down payments exceeding Fannie Mae and Freddie Mac standards. These usually project between 10-30 percent down. A homebuyer can request a jumbo loan, or they can often be required by lenders for high-cost properties necessitating a higher dollar loan. With these loans, if you offer a high enough down payment, you can avoid paying private mortgage insurance, or PMI.
Private agencies insure conventional and jumbo loans. But you can also receive loans insured by the government. The most popular is a Federal Housing Administration, or FHA, loan. These loans are often for borrowers who can’t make a large down payment or have a less-than-stellar credit score. You can secure one with around a 3.5 percent down payment with a FICO score over 580 or so. But if your FICO score is as low as 500, up to 10 percent down is possibly necessary. FHA loans also require an additional upfront and an annual insurance premium payment.
Less common loans
There are also a number of other less common loan types with varying down payments. These include construction loans, interest-only loans, 80/10/10 piggyback loans and others.
For specialty situations, there are several options for loans with no down payment required. The most popular are Veterans Administration, or VA, loans, which, of course, are for active-duty military members, veterans and their families. If you live in a more rural area or are looking to purchase a farm, USDA Rural Development Guaranteed Housing Loan Program loans may also be available to you with no down payment.
10 ways you can save for a house
Did you take a look at your savings and don’t see what you need for your down payment? Well, that’s a lot of people. The good news is that you don’t have to sell a kidney to make up the difference. There are a number of small and medium-sized ways that you can employ to save up some cash.
It might surprise you just how much engaging in seemingly minor adjustments can add up to a wad of savings. Follow these 10 steps to save for your house.
1. Start now and start with your timeline
Even if you’re just starting to think about buying a home, now is the time to start both saving and planning for your down payment. It’s (probably) not like a distant relative is going to bequeath you a fortune.
The best starting place is with a timeline. Determine how much you’ll need for a down payment for a home in your budget. Calculate how far it is between what you have to spend and what you need to spend. Then, decide on a date you want (or need) to move into a new home. Do the math to figure out what you need to save per month. That’s your monthly budget goal.
Conversely, you can determine how much you’re able to save per month, and calculate how long it will take for you to save for your down payment. That’s your calendar date goal.
But remember, home prices fluctuate. You can have the best goal plan, and then the market decides otherwise.
2. Automate and separate your savings
Open a separate savings account just for your down payment. This will help keep you from spending the money you’re saving. Transfer any money you already have saved into the account.
Then, automate depositing consistent monthly payments into the new account. You can use direct deposit from work, or use any bank or internet tool to make the same monthly recurring transfers into it. The less you have to think about it, the more you’ll wind up saving.
3. Make your money work for you
In addition to savings, you can also make your money and your bank accounts work for you. There are a number of bank savings plans you can take advantage of.
Invest with a CD ladder. Using laddering of Certificates of Deposit, or CDs, will help compound interest. When you deposit into a CD, laddering will maximize long-term rates. But they’ll also allow you access to your money when you need it without significant penalty.
Put your money in a high-yield savings account. Standard savings account interest rates are relatively low, at around .01 percent. Although they don’t yield returns as high as they used to, high-yield savings accounts still pay more than standard bank savings. And high-yield accounts give you easy access to your money, and complete liquidity and they are federally insured.
Transfer to a money market account. These accounts are perfect for short-term savings. You’ll have to shop around for an account with higher returns, but they’re insured and are available through everyday banks and credit unions.
4. Find down payment assistance programs
There are many places that offer down payment savings assistance programs if you qualify. These include the federal government, state and municipal governments and non-profits. Even Fannie Mae and Freddie Mac offer down payment assistance programs.
Most programs target first-time homebuyers with mid-to-low incomes. But there are also programs for repeat buyers. As well, there are also several programs specifically for certain job types like first responders, teachers and healthcare workers.
As well, a recent Redfin study shows that nearly a quarter of first-time homebuyers and using their federal government stimulus payment towards their home down payment.
5. Get a raise
Been killing it at work but have been putting off asking for a raise? Now is the time. Tell your boss or manager that you’re starting to save for a new home. Some might consider that a reason to approve a raise. Studies show homeownership makes for better, happier, more loyal employees who stay with their companies longer.
Then, put all your additional earnings from your raise into your down payment savings account with direct deposit. You’ve already been living on what you had before, so extra money is a bonus.
6. Earn some extra money in your off time
Can’t ask for a raise right now or want to supplement? Good thing we live in the era of side hustles and after-hours gigs.
Many people of all income levels enter the gig economy on the side. You can drive for rideshare, deliver groceries for your local supermarket or orders for restaurants or even start walking dogs. These jobs pay much better than you might expect.
You don’t have to chauffeur an Uber or deliver for DoorDash to make extra money. Start a small business on Etsy or Taskrabbit. Gather up and sell all the stuff you never use or your old memorabilia collections on eBay. Put your guest room up on Airbnb. Or, trade on your existing expertise by tutoring or teaching online.
Or, you can side hustle old school. Nearly everyone is looking for employee help. Find yourself a part-time job with flexible hours, and maybe even an employee discount.
7. Cut your expenses
It’s not like you haven’t thought about it. The best way to save for a house is to stop spending so much. Sounds simple, mostly because with little steps it is. You don’t have to starve yourself or stop having fun. But there’s plenty you can cut and still live at your means.
First, identify what you’re able to cut. Go over your bank and credit card statements from the last few months. It may surprise you how much you are spending that you need not.
See if you can buy cheaper alternatives at the grocery store. Put a pause on buying new clothes. Dump the gym and go running or biking around the neighborhood. Reduce the number of streaming services you have. Cancel unused subscriptions entirely. Have you shopped around for new car insurance lately? Check to see if you can save elsewhere.
Paying by credit card? Consider switching to a cash-back card that pays more for the things you buy more often, whether that be gas, food or even loans. And a full 12 perent of first-timers are selling their cryptocurrency to put towards a down payment.
8. Manage your debt
Paying down student loans, auto loans and credit cards, etc., are tough monthly expenses. Particularly when you add interest on top of it. If you can, pay down the ones with the highest interest rates or most total monthly interest first, or at least at the fastest rate. You can even look into refinancing for a lower interest rate.
Not only will you eventually be paying less a month in interest, but paying down debt helps your credit score which may get you better home loan terms.
9. Put a short-term pause on retirement savings
Yes, it’s critical to start paying into your retirement at a young working age. And yes, it’s important to keep paying into it, even in tough times. Because one day, you’ll need that nest egg. But if you feel your future employment is safe, you can scale back on what you’re contributing to retirement, temporarily. Then, take that money and put it into savings for your down payment. Whether from your own pocket or through your 401(k), consider briefly reducing the amount and earmarking it for your home.
Additionally, if you’re a first-time homebuyer, you can even tap into your IRA. The service allows for borrowing up to $10,000 towards a down payment. But, of course, discuss this with your financial or tax professional first.
10. Move back home
If your situation, location and sanity can afford to do it, consider moving back home with your family. This isn’t 1995 anymore. It’s become quite normalized for younger people in the workforce to move back in without societal scorn. And if your parents are older or in need of care, it’s mutually beneficial. Win-win.
Even if you pay your family rent and it requires renting a storage unit, there are still plenty of savings. Living back home can help you save for a house while cutting back on monthly rent, security deposits, parking, insurance and utilities and other expenses.
Save money for your dream house
The easiest way to avoid a pricey down payment hit is to pay all cash upfront for your new home. But that’s obviously not realistic for the vast majority of homebuyers. But when you ask yourself the question, “How do I save for a house?” there are, thankfully, many options. Heeding the 10 solutions above can get you well on your way to being able to afford your down payment, and then, your mortgage and home.
The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.
Source: rent.com