Saving for a down payment can pose a major challenge for first-time home buyers. However, by breaking down the process into smaller, actionable steps, it becomes more manageable. While saving up for a down payment may take time, employing a few strategies and tips can help you reach your goal sooner than anticipated. Here are five steps to get you started on your journey.

Figure out how much you will need for a down payment

The down payment is the initial cash payment made towards a home loan, typically expressed as a percentage of the home price. While many believe that a 20% down payment is necessary for a mortgage, this is not always the case. Although making a 20% down payment allows you to avoid private mortgage insurance, lenders rarely require such a large payment.

If you have a strong credit score and manageable debts, lenders may be willing to lend you more while requiring a smaller down payment. Moreover, different types of home loans have varying down payment requirements.

• Conventional loans. The majority of mortgages are conventional loans that follow conforming loan standards established by Freddie Mac and Fannie Mae. Adhering to these standards can pose challenges when seeking qualification for a conventional mortgage. Nevertheless, with strong financials, it is possible to make a down payment as low as 3%.
• FHA loans. FHA loans, supported by the Federal Housing Administration, enable homebuyers to secure financing with as little as a 3.5% down payment. The required down payment amounts may vary based on credit score.
• VA loans. Supported by the U.S. Department of Veterans Affairs, VA loans offer borrowers the advantage of skipping the down payment. These loans are exclusively available to current and former U.S. service members, as well as qualifying spouses.
• USDA loans. USDA loans, backed by the U.S. Department of Agriculture, typically do not necessitate a down payment. Designed for borrowers residing in rural and suburban regions, these loans may have income limitations.
• Jumbo loans. Jumbo loans refer to mortgages that exceed conforming loan limits. These types of mortgages are not eligible for insurance or backing like other loans, which is why lenders typically require higher down payments, starting at 10%.

2. Utilize financial tips to save as much as possible

Regardless of the dollar amount, implementing a multifaceted approach can be advantageous. By making astute financial decisions, you can expedite the process of saving for a down payment.

• Automate your saving strategy. Optimize your finances by setting up automatic transfers from your checking to your savings account. This simple step not only ensures a seamless process but also eases the pain a little. Additionally, consider the possibility of having a portion of your paycheck directly deposited into your savings account by your employer.
• Save all extra money you receive. Whether you receive a raise, a bonus, or a tax refund, consider adding the extra funds to your down payment savings instead of splurging. Having a little windfall in your savings can serve as a motivation to further grow the balance and make it even more substantial.
• Save your spare change. Not necessarily in a traditional piggy bank (although that’s an option too, if you prefer). Numerous banks and savings apps offer a feature where card purchases can be rounded up to the nearest dollar, with the extra change deposited into a connected savings account.
• Utilize a cash-back credit card to maximize your benefits and savings. Indeed, redirect those funds towards your down payment fund. To maximize your cash back, make a conscious effort to charge as many purchases as possible to your cash-back credit card. Just remember to pay off the balance in full each month to avoid interest charges that could diminish your earnings.
• Be A Smart Driver. Once you’ve paid off your car, resist the temptation to splurge on a new ride. Instead, save the money you used to pay as a monthly installment. If you’re still making payments on your wheels, consider refinancing your auto loan to reduce your monthly payments. And if it’s been a while since you last reviewed your car insurance, take the time to compare rates and find a better deal. By doing so, you can save even more and put the difference towards your savings.

3. Put savings for your down payment in the right places

As you diligently save towards your down payment goal, you might wonder how to make the most of your money. While investing may seem tempting to maximize your returns, it’s not the best approach unless you have a long timeframe of eight to ten years or more before purchasing a home. The stock market’s volatility can pose a significant risk for short-term savings, potentially hindering your progress and dampening your motivation.

Here are a few alternative options that could potentially be even better:

• High-yield savings accounts offer a lucrative opportunity to grow your savings. In today’s landscape, the term “high-yield savings account” may seem misleading due to the relatively low interest rates offered. However, these accounts remain a reliable option for individuals looking to save in the short to mid-term. With easy accessibility, complete liquidity, and FDIC insurance, they provide peace of mind. It’s worth noting that they still offer interest rates higher than 0.01%.
• Money market accounts are a popular choice for savers. For those who prioritize short-term savings, a money market account presents a viable choice. These accounts, offered by banks and credit unions, come with the added benefit of being insured. Similar to savings accounts, it may require some exploration to uncover competitive returns.
• Certificates of deposit (CDs). Consider opening a certificate of deposit (CD) that aligns with the timeframe when you anticipate having the majority of your down payment saved. CDs typically offer slightly higher interest rates compared to savings accounts or money markets. However, it’s important to note that the funds in a CD are typically inaccessible until the end of the term, which can range from six months to a year or even longer. Withdrawing the money before the term ends may result in a penalty.

Although the returns on these options may currently be modest, saving for a down payment is not just about earning significant interest. It’s about keeping the cash out of sight and out of mind. Additionally, each of these savings options can be conveniently set up for automated transfers from your checking account.

4. Avoid tapping into your other savings.

While the temptation to dip into your existing savings may be strong, it is advisable to refrain from doing so, especially if those funds have been designated for other important goals. This includes:

• Emergency fund. While it is true that the money you’ve set aside serves as a safety net for unforeseen circumstances, it is wise to exercise caution and refrain from dipping into your emergency fund until you truly require it. This need may arise when you are in the process of purchasing a house, such as when you need to bridge an appraisal gap or cover the costs of a significant repair shortly after.moving day.
• 401(k). Borrowing from a 401(k) can be a risky move. If you lose your job, the loan must be repaid by the next tax-filing deadline. Otherwise, it will be treated as ordinary income, subject to a 10% penalty if withdrawn before age 59½. Although certain exemptions allow for penalty-free early withdrawals (such as buying a house, which qualifies as an “immediate and heavy financial need” according to the IRS), depleting your retirement savings now can have significant repercussions in the future. It’s important to consider the potential long-term consequences before making such a decision.
• Your IRA. First-time home buyers have the option to withdraw up to $10,000 from an IRA without incurring any penalties, as long as they intend to use the funds for purchasing a home. However, it’s important to note that income tax will be due on the withdrawal, unless it is from a Roth IRA. While this may initially seem like a favorable idea, it’s crucial to consider the long-term implications of tapping into retirement accounts for a house purchase. Falling behind on retirement savings can have significant consequences on your post-work life, and only a few individuals can afford such setbacks.

5. Seek assistance in saving for a down payment.

Whether you’re nearing the finish line or struggling to envision how you’ll accumulate enough funds, various types of down payment assistance can offer a helping hand.

Explore local and state programs tailored for first-time home buyers. These initiatives often provide down payment grants or assistance, along with tax credits and support for closing costs. Typically administered by housing finance agencies or through grants from the U.S. Department of Housing and Urban Development, each program has distinct requirements. For instance, some may impose income limitations or mandate completion of a home buyer education course.

Receiving gift money from relatives or friends can be a fortunate boost. However, it’s important to note that the money must be given as a genuine gift, not a loan. Typically, you will need to provide documentation to explain the source of the funds. It’s worth noting that the specific guidelines for using gift money can vary depending on the loan program. In some cases, you may also be required to contribute a minimum amount of your own funds, in addition to the gifted money.

Contact Sword Mortgage To Learn More About Your Options

Call (770) 757-5750 or complete our online form to speak with a loan expert at Sword Mortgage to get help navigating your options and find a loan that fits your needs today.