If you’re thinking about buying a home in 2017, saving up for your down payment may seem like a monumental task, but it is doable. According to the National Association of Realtors, 35% of all purchases for 2016 were made by first-time homebuyers, a trend that’s expected to continue this year. If these new homeowners can do it, so can you. The trick is to make a plan to save the money you need for a down payment and follow it.
Here are nine ways you can take to create a savings plan for your down payment.
Open a New Savings Account — Open a savings account specifically for your down payment at the same credit union or bank where you currently do your checking. By opening a savings account at the same institution, you will easily be able to transfer funds between your checking and savings accounts, allowing you to quickly and conveniently move money into your savings account without the need to stop by a branch to make a deposit.
Set a Savings Goal — You may be able to get a mortgage with as little as three and a half percent down. To determine how much you need to save each month, determine the median price of the type of home you are looking at. The best idea is to get prequalified so you’ll know how much you have to spend on a home. As much as savings and downpayment are important, income and credit are big factors too. Keep closing costs in mind (about 2% of the purchase price, though sometimes we can get sellers to contribute towards closing costs).
Make Savings Automatic — Set up a direct deposit into your savings account via your employer, or set up a regular, recurring transfer from your checking account into your savings account. For example, set up a transfer of $100 from your checking to savings account to repeat every two weeks. Every little bit helps, if you can’t do $100, do $25 or $50. If the deposit is automatic via payroll, you’ll never even see that money in your checking account, or be tempted to spend it.
Create a Budget — Budgeting is a wise financial move, whether or not you are saving up for a big purchase, and it can be a particularly helpful step in your home savings plan. Once you know your savings goals, use a spreadsheet to show your monthly gross income. Then, subtract taxes and other withholdings from your paycheck. The sum is your net income. Next, show your monthly expenses such as rent, utilities, car payments, insurance, loan payments and other bills. What you have left is yours to spend or save. Keep your receipts to track spending; this will give you a clear picture of where your money goes each month and where expenses can be cut. If you want to save more, you’ll have to spend less. Set a time each month to review your spending and budget and make adjustments as needed.
Cut Expenses — Put on your negotiating cap and work to get lower interests rates on existing loans and credit cards or discounted rates on subscription services such as cable and Internet. If you can go without amenities like cable, cut it out and put that money toward your down payment instead. Rather than spending a big chunk on a family vacation this year, put that money in your savings account. Although your vehicle may be an embarrassment to drive, if it’s running, put off buying a new car until after you’ve purchased your home.
Create More Income — Do you have expertise or skills you can put to use to increase your monthly income? Look for ways to bring in extra money, such as doing freelance graphic design or writing; substitute teaching; or driving for Uber. If you are eligible for overtime at your job, take every opportunity that comes your way.
Take Advantage of Cash Windfalls — Tax refunds, birthday money, garage sale income — put 100 percent of any of these one-time cash infusions into your savings account. If you’ve established a good budget, you don’t need that money for anything else. Let family and friends in on your savings goals and ask for cash gifts for birthdays and holidays.
Save Less for Retirement — If you have a 401(k) match through your employer, save enough to qualify for that contribution, but no more. Instead, put that extra money toward your savings for a down payment. Once you are all settled in your new home, you can increase your retirement savings again.
Boost Your Credit — You’re entitled to one free credit report from each of the three credit agencies each year. Rather than getting all three at once, space them out throughout the year so you can get a free report every few months. Carefully review your credit report on a regular basis to make sure it is error-free. According to the Federal Trade Commission, about 20 percent of all credit reports have mistakes. If you have any negative marks on your credit report, contact the reporting institution to see if there’s anything you can do to get the negative mark removed from your credit account. Give yourself several months to clean up any errors and take care of disputes.
To increase your credit score, pay down credit cards and loans and pay your bills on time. Aim to keep your credit utilization below 30 percent. For example, if you have $20,000 available in lines of credit, be sure your balance never tops $6,000 per month. The lower your credit utilization, the higher your score will be. Never close old accounts. If you pay off a credit card, that’s great! But be sure to keep the account open. This will help keep your credit utilization low. Avoid applying for too many new lines of credit when you’re working to save for a home. Credit applications can knock your score down a few points.