Saving money is critical to open the path to homeownership. But once you achieve this milestone, you can unlock the many benefits of owning real estate. However, for the average American, this task can be easier said than done.
But don’t worry— you don’t need to save up the entire purchase price of a home! When it comes to affording a house, one of the most important factors is having enough money for the down payment and its closing costs.
How do home buyers reinforce their personal finances to save for a house, and how much should they put aside? This guide will help first-time home buyers and homeowners bring enough cash to the closing table.
How do first-time buyers save for a home?
If you’re not a homeowner, it’s essential to save money with great discipline since you don’t have home equity to draw from. With elevated interest rates and stricter post-2008 loan qualification terms, it’s important for buyers to be financially fit.
Thankfully, with the proper preparation, first-time buyers can secure a mortgage loan with enough closing costs and down payment savings in the bank.
Here are three main things to remember. Prepare your finances by:
- Improving your credit score.
- Lowering your debt-to-income ratio.
- Putting more money in the bank.
These big three quests all culminate toward your primary goal of having enough for your lender to say “YES” to your pre-approval. Then, you’ll be on your way to owning your first home!
How much do you need to save for a down payment?
Having enough money to close will boost your lender’s confidence and even improve your future mortgage payments. Though there is a lot of talk about paying 20% of the home sale price, you don’t actually need to save that much to qualify.
In fact, many buyers don’t pay that much. Bankrate reports the average down payment was 14.71% of the home’s purchase price (Source: ATTOM Data Solutions.)
If almost 15% is too high, then no worries. If you have a good credit score and enough income, you can qualify for a conventional loan with as little as 3% down. If you use an FHA loan, the minimum down payment percentage is 3.5%. While we do advise you to save more for easier qualification and better rates, it is possible to offer that little with this kind of loan.
Want to go even lower? Check out Rocket Mortgage’s ONE+ loans, which allow down payments as low as 1% of the home’s purchase price. If you’re in a tough financial situation, this option can open some doors that would be challenging to enter otherwise.
Are there “no down payment” loans?
Yes, you can potentially get a new home without even putting money down. If you’re an active-duty service member or veteran, you may apply for a VA loan which has zero money-down options.
If you’re not in the military, then it’s also possible to put zero down with a government-backed USDA loan. Speak with your lender to find out all your options based on your qualifications, work history, and financial profile.
How do existing homeowners save for a home?
If you already own a home, then your path should be similar to a first-time buyer. Save money, work on your credit score, and fine-tune your debts vs. income ratio. However, you have one significant advantage: already owning a house. This means you may have enough equity to take out the large sum you need for a down payment.
Ask Marketplace Homes about our special incentive programs like Sell and Stay that can make your next offer more competitive. We can buy your home, give you the sale proceeds, and even let you stay in your current home until your new construction home is complete.
Saving for a Down Payment for First-Time Buyers and Homeowners
Here are some tips on putting as much money as you can into your down payment fund Overall, do your best to increase your income and spend less. We know this is easier said than done, so here are some practical tips.
1. Get control of your subscriptions.
Modern life has us sign up for various subscription services and streaming channels that we may not even need. Thankfully, there are some handy subscription-canceling apps that help consumers gain ground.
2. Get a side hustle.
Ever want a fun part-time job in a field you love? Or how about opening up a monetized social media account where you make extra money on ads? When you make extra cash, the excess can go straight into savings or investments. Side gigs can be active or passive, in-person or remote, so find the option that helps you meet your savings goals the best!
3. Open a high-yield savings account.
Normal bank accounts aren’t exactly known for their fantastic dividends. But if you put your money to work for you in a high-yield account like a CD, you can see more growth. To meet your financial goals in this way, speak with a financial expert who can help you invest your money the right way. There are short-term and long-term options, so explore them all to see which ones would work for you.
4. Increase your mainstream income.
If you work 9-5, finding a side hustle may be the last thing on your mind. In this case, you may ask for a promotion, a raise, or change jobs. When you get an income upgrade, pretend like it doesn’t exist and put all the extra proceeds in savings. The extra money that doesn’t require a side hustle multiplies your time and is also satisfying.
5. Pay off debt.
Car payments, credit card payments, and student loans can stunt your savings potential. Pay off these debts first to make saving easier. Mortgage lenders want to see less debt, more savings, high credit scores, and on-time payments.
6. Skip vacations or make shorter trips.
There are many ways to relax without spending thousands on plane tickets and hotels. Find local places to unwind for a season, and your wallet will thank you. Go up to a successful person and see how they got there. If they haven’t inherited wealth, then they sacrificed. However, even inheritors have to exercise good financial sense to stay successful.
7. Examine your budget and trim the excess.
Ask yourself what you truly need and eliminate the items in your budget that take away from your savings. Downgrade your internet plan, cut the cable, trim some devices off your cellular plan, or cancel that spa membership you don’t use frequently. All your monthly payments add up!
8. Automate deposits to make saving easier.
It can be tough to save if you want to spend money as soon as you see it. Fortunately, you can automate part of your paycheck into a separate account, so you don’t get the urge to spend.
9. Get a roommate.
Your own home, even if it’s a rental, can become a source of collateral. If you have an extra room in a house, you can rent it (with your landlord’s permission). This turns into automatic extra income without any other changes since you’re paying less rent.
10. Dump tax refunds into savings.
If you are one of the chosen ones who get refunds at tax time, then use this asset to your advantage. Put it into savings or a high-yield investment account and let that money accumulate. Even without doing anything else, you can have a decent amount saved in about a decade, especially if you average a few thousand back per year.
Want to take saving to the next level? Saving more than just enough money makes it easier to qualify for a home loan. Borrowers who bring a surplus can also pay down the loan enough to eliminate private mortgage insurance (PMI) and unlock lower interest rates.
How much are closing costs?
Another large expense that first-time buyers don’t know about is closing costs. These fees can amount to 3 to 6% of the house’s total value, which adds to thousands extra at the closing table. The buyer typically pays this in a seller’s market, while in a buyer’s market, the buyer can get some help from the seller.
However, if the closing costs are holding you back from offering a more competitive down payment, you can apply for a no-closing-cost mortgage through your lender. This option will roll the fees into your loan in exchange for a higher interest rate.
How to Save Money for a House
Saving money for a house can be a long process, but once you have enough to pay for closing costs and the down payment upfront, you can make your dream of buying a home come true.
To find out more about our special incentive programs or to speak with one of our real estate agents, contact Marketplace Homes today.