Millions of people dream of one day owning their own home, but either don’t know where to start or have found it impossible to get the momentum they need to afford one.
There are a few financial variables that can hold you back here. For example, if you have a poor credit score, you may have difficulty finding a lending provider willing to provide you with a mortgage. If you don’t make enough money on a monthly basis, you may not be able to afford monthly payments. But most people get stuck trying to come up with a down payment—the initial amount of money you’ll put down for your home.
Fortunately, if you’re struggling with coming up for a down payment on your home, there are a few important strategies you can use to succeed.
Understand How Much You Need
First, understand how much of a down payment you really need. If you’re trying to avoid the possibility of private mortgage insurance (PMI), it’s advisable to save 20 percent of the purchase price of the home. For a $200,000 home, that amounts to $40,000, a hefty amount for most aspiring homeowners. If you’re just interested in meeting the minimum requirements, you may only need 5 percent, which amounts to $10,000.
The amount you’ll need for a down payment will vary based on your area (and the average purchase price of homes there), your financial goals, and your credit score. If your credit score is low enough, your bank may request a higher down payment to consider the loan.
Once you have this figure in mind, you can start trying to earn it.
Focus on Eliminating Debt
The average American carries something like $38,000 in personal debt. If you have lots of standing student loans, credit card debt, and other forms of debt, it’s a good idea to make debt elimination your top priority. Eliminating debt will have multiple positive effects:
- Reducing your monthly expenses. Chances are, you have bills for minimum monthly payments on your car, student loans, credit cards, and more. If you eliminate your debts entirely in these areas, it will decrease your total monthly expenses. It may take a while, but if you can eliminate $500 a month of minimum monthly payments, you’ll set yourself on a track where you can save $500 a month for your home—that’s $6,000 a year, with no additional sacrifices.
- Lowering your total amount paid. Most of your debts have a moderate to high interest rate, which will compound over time. The sooner you pay off your debt, the sooner you’ll cut off this cycle. For example, let’s say you have $8,000 in debt with an interest rate of 15 percent. If left completely unaddressed, that 15 percent interest rate will make your $8,000 accrue to $17,271 in just 10 years—adding $9,271 in unnecessary extra expenses. Wouldn’t you rather put that $9k toward a home?
- Improving your credit score. Your debt to income ratio and total debt play a major role in determining your credit score. If you can reduce your debt, you’ll improve your credit score, ultimately making it easier to borrow money for a home—and possibly lower the amount of money you need to save for a down payment.
It may not seem like funneling extra money to your credit card bill is a step toward saving up a down payment for a home, but it is—especially if you’re planning for the long term.
Structure a Stricter Budget
Whether you’re focusing your extra money on eliminating debt or are funneling all your funds to a savings account for a down payment, you’ll need to create a strict budget if you want to succeed. The basic idea is to take control of all your expenses, and reduce them as much as possible without significantly influencing your quality of life.
If money is extremely tight, you might consider moving to a lower-cost area; housing expenses take up a disproportionate amount of your budget, and moving somewhere cheaper could easily save you hundreds of dollars a month. If that’s not an option, try to cut your living expenses by shopping at a cheaper grocery store, and using less water, gas, and electricity. You could also consider taking public transportation or biking, rather than driving, to save on car-related expenses.
Beyond that, your best bet for saving money every month is cutting back on entertainment expenses. Cook more meals instead of going out, and focus on low-cost forms of entertainment, like going to a local park instead of paying to see a movie. Pay attention to your subscription costs, as well, especially streaming services; these can add up fast.
Consider Getting Another Line of Income
If you’ve created a stricter budget but still aren’t saving as much money as you’d like, you can hasten the process by getting another line of income, or by increasing your current income. Asking for a raise or seeking a promotion is a straightforward way to go, but it isn’t possible for all people or career paths.
Instead, it may be more accessible for you to pick up a second, part-time job, or a side gig. Side gigs like ridesharing, babysitting, and freelance photography are all fantastic options because they allow you to set your own hours; you can keep your full-time job and simply work extra hours as you have the time. Even if you only make a few hundred dollars a month, that amount can quickly add up; combined with the few hundred dollars in cost savings from your new, stricter budget, you’ll be on the fast track to saving a full down payment for your next house.
If you’re interested in buying a house, but you’re new to the process, Green Residential can help. We have real estate agents who can help you find the perfect home—no matter what your budget or goals are. Contact us for a free consultation today!