It can feel daunting to save up for a down payment on a house. Finding extra money to put aside each month can be impossible if you’re carrying in debt, fielding calls from unprofessional collectors, and struggling to control your finances. However, with some research, organization, and discipline, you’ll be surprised at how quickly you can reach your goal. Keep reading to learn how choosing the right mortgage, making a budget, and learning how to invest can help you save up a down payment in less time.
Research Low Down Payment Mortgage Loans
Before you start saving for a down payment, you need to know your target amount. The traditional 20% down payment can be a great goal for some people, but it’s not the only way to finance a home. If you’re carrying debt, a 20% down payment is unlikely to be the quickest savings goal.
Fortunately, there are many low down payment mortgage loans available. Understanding the criteria for each type of loan will help you set a realistic savings goal and make ownership cheaper than renting.
The Federal Housing Administration (FHA) loan is one of the most popular low down payment options. FHA loans require just 3.5% of the purchase price as a down payment, and they’re available for both single-family homes and certain multi-family properties. That said, FHA loans also come with private mortgage insurance (PMI) premiums, increasing your monthly mortgage payment. Make sure you factor in the total home buying cost to your overall budget.
A Department of Veterans Affairs (VA) loan is a zero-down payment option for qualifying veterans and active military members. VA loans don’t require a down payment but have strict eligibility requirements.
Finally, the United States Department of Agriculture (USDA) offers a loan program for rural homeowners. The USDA loan program requires no down payment, but there are income limits, and the property must be in a designated rural area.
Reduce Unnecessary Spending
A crucial part of saving for a down payment is reducing unnecessary spending. This can be difficult, but it’s important to remember your long-term financial goal.
Start by evaluating your current budget and identifying areas where you can reduce spending. This may include things like eating out, entertainment, and shopping. Use the insights to create a budget that prioritizes your down payment savings.
Automated savings can also help ensure your reduced expenses go into a secure account. Consider opening a separate savings account for your down payment funds and setting up automated transfers from your checking account. This will help you stay disciplined with your savings goal and make it easier to reach your target number.
Optimize Your Credit Score
While optimizing your credit score doesn’t directly increase your savings, it can help significantly lower the amount you need to save.
Lenders evaluate numerous factors when considering you for a mortgage loan. Your credit score tells the story of your debt history, and a higher credit score demonstrates your ability to repay debt, making it less risky for the entity to provide you with a loan. As a low-risk borrower, most banks will be more willing to provide you with a lower down payment with favorable terms.
- Here are a few everyday habits that will help you improve your credit score:
- Maintain a healthy credit utilization ratio
- Dispute any errors during your annual credit check
- Make prompt payments on all debt
- Pay off lingering high-interest debt as soon as possible
Earn Extra Income With a Side Hustle & Windfall Earnings
A side hustle is a great way to accelerate your down payment savings. If you have extra time, consider taking on a part-time job or starting a small business venture. The extra income can be used solely for your down payment fund, helping you reach your goal more quickly.
Side hustles are more available today than ever before. Ridesharing apps, food delivery services, and freelance work all provide reliable payments and flexible schedules that can bolster your full-time earnings.
As your income increases, be sure to adjust your budget accordingly. Consider increasing your automated savings transfer to ensure you’re putting away as much money as possible towards your down payment.
Another way to accelerate your savings is to take advantage of windfall earnings. Windfall income refers to tax refunds, work bonuses, and monetary gifts. If you receive any lump sum payment, consider using it to supplement your savings. Windfall checks are always a pleasant addition to any budget. While spending unexpected earnings on things you want can be tempting, putting it towards a down payment will speed up the process.
Save Less, Invest More
This may sound counterintuitive, but investing more money is another way to speed up your down payment savings.
There are a few reasons this strategy can be effective. First, it allows you to take advantage of compounding interest. When your money is invested, it has the potential to grow over time. This means the earlier you start investing, the more time your money has to grow.
Second, investing can provide you with additional income that can be used for your down payment. If you invest in stocks or mutual funds, you may receive periodic dividends that can be reinvested or withdrawn and used for other purposes.
Finally, investing can be a great way to financially prepare for owning a home. If you’re like most people, your home will be the biggest investment of your life. The equity you build through homeownership can pay off tremendously down the line.
By becoming a seasoned investor before owning a home, you’ll better understand how to hold onto valuable assets as they appreciate.
Every Penny Counts on Your Savings Journey
With a little effort and some thoughtful planning, you can speed up the process of saving for your down payment. Small steps make a big difference when it comes to reaching long-term goals like this. Start by researching low down payment mortgage loans and finding one that fits your budget. Then take a look at your expenses and see where you can cut back on unnecessary spending. Next, work on optimizing your credit score to qualify for the best interest rates. And finally, start earning extra income with a side hustle, windfall earnings, and investments. By taking these steps, you’ll be well on your way to having enough money saved for a down payment in no time!