By Shantell Lorraine Nicole Russell of New American Funding*
June 8, 2015
Originally Published on June 4, 2015
Rental rates are quickly rising making it more difficult to continue affording an apartment. While purchasing a home might seem like a less expensive option, saving for a down payment on a house is likely one of the more difficult aspects of becoming a home owner. One of the common standards for a down payment is 20 percent of the total value of the home. This can add up quickly and between mountains of student debt and the entry level job market, setting aside funds can be a challenge. However, with more lenient lending standards and a few tricks, you can start saving and become one step closer to owning a home of your own.
Understand the importance of a down payment
Before you begin planning to save up some extra cash, know how a down payment impacts your ability to become a homeowner. A down payment is the money you put toward a home right away. Zillow noted that the amount you can contribute upfront can impact the type of home mortgage you qualify for and ultimately how much house you can afford. In addition, your credit score and income also contribute to the home loan you ultimately receive.
This can help you determine how much you want to save for your future home. If you would like to purchase a more expensive home, but do not have the credit score or annual income to support higher monthly mortgage payments, providing a larger down payment can help ensure you still can afford a home more congruent to your preferences. Additionally, paying less than 20 percent of the total value of the home may mean that you need to also pay mortgage insurance on a regular basis.
Mortgage insurance is a way to back up a loan in case you are unable to make payments due to your financial circumstances.
Options for low down payments
If you are interested in acquiring a home without spending a great deal of money up front, Freddie Mac and Fannie Mae, government-backed lenders, both offer loans with 3 percent down payment options.
First-time homebuyers may qualify for these affordable options depending on their ability to provide specific information and meet certain standards to avoid underwriting mortgages. For example, Freddie Mac mandates that applicants can cover the closing costs as well as the full down payment agreement. Additionally, homebuyers must enroll in a borrower education program similar to the one offered by Freddie Mac. Fannie Mae also implemented similar requirements to combat lending money to an unsuitable candidate who is unable to afford a home.
Techniques for saving money
After deciding how much money you wish to save for a down payment, USA Today recommended setting up automatic contributions to your savings account every pay period. This ensures that you are not tempted to dip into your pot and spend any of your money before putting it into your savings account. In addition, automatically sending money to your savings account is a great idea as long as you have properly budgeted for a specific amount to be contributed regularly.
Developing an adjusted budget to accommodate your new efforts is an important step to the process. Decide how much money you need for your expenses, like rent, bills, food and any debt. Then allot additional money for recreational spending.
The Daily Finance also noted it might be a smart idea to keep your savings safely stored away somewhere that it is more difficult for you to access. Consider starting a high-yield savings account or CD.
Know where to make cuts
There are a number of frivolous expenses that can add up and prevent you from saving for a down payment on a house. Below are some extra expenses you might consider reducing to help increase your savings:
- Making daily coffee shop runs
- Eating out regularly
- Going out to the bars
- Going to the movies
- Taking weekend trips
- Having regular manicures or pedicures
- Attending concerts, plays and other performances
Add additional income
If you are ready to purchase your first home as soon as possible, you may want to increase your annual income. Consider picking up a weekend job or increasing your overtime hours at your current job. Automatically put all extra incoming money into your savings account to help quicken the growth of your future down payment. Think about doing a little freelance work to increase your total income as well.
Additionally, if you receive any extra cash, such as a tax return or birthday money from a family member, contribute that toward your savings. Money Manifesto recommended pretending that this extra income does not exist and automatically depositing the extra funds to help with your down payment fund.
Becoming a homeowner is a substantial milestone. Start saving for your down payment if you are interested in making the step toward owning your very own property.
*Article reprinted with permission from New American Funding. Licensed by the California Department of Business Oversight under the Residential Mortgage Lending Act – License #4131117 Broker Solutions Inc. dba New American Funding (NMLS #6606) Corporate Office is located at 14511 Myford Road, Suite 100, Tustin, CA 92780. 800.450.2010