Saving For Down Payments

Are you tired of renting? Do your rent payments continue to get higher? Are you interested in purchasing your own home, but feel it’s too difficult to save up the money for a down payment? You are not alone. Many renters feel money is the top reason they haven’t been able to purchase a home yet.

When someone is interested in becoming a homeowner, the recommendation from experts has always been to save 20 percent of the purchase price of the home for a down payment. However, the belief that making a 20 percent down payment is a requirement to purchasing a home is nothing more than a commonly circulated myth. If we cannot afford the full 20 percent, that does not mean we cannot become homeowners. There are many mortgage programs that don’t require a 20 percent down payment, as well as down payment assistance programs which up to 87 percent of home buyers can qualify for. There are also three government backed mortgage programs which allow for down payments of less than 5 percent:

• The Federal Housing Administration (FHA) Mortgage allows a 3.5 percent down payment. Through the FHA loan product, HUD makes low-down payment mortgages available to U.S. buyers in all 50 states and the District of Columbia.  FHA loans also provide flexible underwriting standards so that “second chance” buyers can get approved without any hassle. The FHA Back to Work loan also lets buyers apply for a loan 12 months after a bankruptcy, short sale or foreclosure.
• The veterans-only VA Loan from the Department of Veteran Affairs offers 100 percent financing with underwriting standards sensitive to the needs of military families. Via the Department of Veterans Affairs, veterans of any U.S. Armed Services branch can access the VA loan. Because VA loans are guaranteed against loss by the government, VA mortgage rates are lower than a comparable conventional mortgage. The VA loan never requires mortgage insurance, regardless of the down payment.  
• The Conventional 97 program allows a 3 percent down payment. This program is available to first-time buyers and repeat buyers, and can even be used to refinance. Typically, this program is a good choice for home buyers with at least above-average credit scores, and who are able to verify their income and employment.

Another option is the USDA Rural Housing Loan, also known as the Section 502 loan. Like the VA loan, USDA mortgages do not require a down payment. Home buyers can finance up to 100 percent of the home’s purchase price. The USDA loan program is backed by the U.S. Department of Agriculture, and is meant to help households of modest means. The program has an income limit for its borrowers based on the average income for the area that they live. Mortgage rates for the USDA loan are often the lowest of all government-backed programs.

Setting enough money aside for a down payment may seem daunting, but there are small steps we can take to change our spending habits and build our savings. Here are some tips we can use to begin saving for our home purchase:

1.      Start with a clear down payment savings goal.  

There are three questions we should consider when determining our down payment savings goal:

• How much should I save for the down payment?
• How long will it take me to save for the down payment?
• Where is the best place to deposit the money I’m saving for a down payment?

To help calculate a saving plan that works best for us, resources such as BankRate’s Saving Calculator can assist in determining an ideal monthly deposit based on our savings goal and bank account interest rate. We can also consider scheduling automatic deposits into our savings account through our bank to make sure we do not fall behind in building our savings.

2.      Cut some expenses from our budget

When saving money, cutting back on expenses in small ways can often make a big difference. Here are some ideas to help us trim our spending while building savings for our new home:

• Take a break from the gym and exercise at home or outdoors instead
• Save eating out for special occasions
• Cut back on expensive cable packages
• Go on vacations closer to home

Cutting these expenses could save us a lot of money every month to help us meet our savings goal.

3.     Consider a side job or alternate sources of income

If we are looking for another way to boost our income, we may want to consider taking on a second job if our schedule allows for it. A second job can help us supplement our income while also increasing our savings, often making it easier to achieve purchasing goals without depleting our finances.

If we are unable to take on a second job, there are other small ways we can supplement our income, such as holding an old-fashioned garage sale or selling unneeded items on Ebay.

Before we make the commitment to become a homeowner, we should first understand all the costs associated with homeownership. To better prepare for these costs, there are educational resources available, such as ESOP’s free homebuyer education workshop for residents of Cleveland and Warren in Ohio. These workshops will provide valuable information on important aspects of the above tips and more, and can put us well on our way to reaching our down payment savings goals and obtaining homeownership. If you are unfamiliar with the educational resources available in your area, seek out a local housing counseling agency for more information on free homeownership classes and workshops using the HUD locator.