Strategies to Save for a Down Payment On a Home

Wouldn’t it be nice if you could find a home, fall in love with it, and simply pay for it on the spot?

That’s a financial luxury most of us don’t have.

A mortgage can provide funds to finance a home, but there’s a catch: This loan is not for 100 percent of the price. Lenders want you to be financially invested in the property, and they also want to minimize their risk should you fail to repay the loan. That’s why they require you to make a down payment, typically about 20 percent of the home’s purchase price.

If you want to buy a $250,000 home, you will need $50,000 in cash up front.  While the amount may seem daunting, there are advantages to putting money down.

First, you’ll be financing less of the purchase price, so you’ll save thousands of dollars in interest over a 30-year mortgage. Second, you’ll avoid having to pay private mortgage insurance (PMI), which is an insurance policy a lender may require you to purchase. This can add 1% of the home’s price tag to your loan, which rolls into your monthly mortgage payment, and again, can add up to a significant amount over the course of a mortgage.

Saving for your down payment is not impossible, but it will take determination, patience and some sacrifices. Read on for ways to save.

1. Eliminate debt.

When you apply for a mortgage loan, a lender will look at your debt-to-income ratio. The ratio shows your monthly debt as compared to your monthly income and is one of the factors used to measure your creditworthiness.

It’s wise to enter the homebuying process with your financial decks all clear so that you can focus on putting extra money toward your down payment fund, not debt. When you kick your savings into high gear, you should strive to be credit card debt-free. Also remember to keep contributing to a rainy day fund. This fund should account for about three to six months of expenses and should be separate from your down payment fund.

Finally, set up a high-interest savings account to accept your deposits for your down payment fund. Having a separate account will make it easier for you to save for a specific goal (and avoid withdrawing money for other goals). You can also put savings on autopilot by setting up automatic transfers.

With all of these tasks accomplished, you’re ready to start saving!

2. Trim your spending.

Good savers have a budget to keep their spending in line, and today, there are a number of mobile apps we can turn to: Mint and Goodbudget are popular ones for budgeting and tracking spending patterns.

Use a budget, along with some creative tips, to find ways to save some big money:

The biggest dent in your budget will most likely be your monthly housing and utilities. If you live near family or close friends, consider asking them if you can live in the basement or a spare bedroom for a specified time, say a year. The median monthly asking rent in the United States at the end of May 2022 was $2,002, not including utilities, which we’ll estimate at $200 per month, for a total of $2,002 per month.

If you paid a family member $400 a month to rent a room, you would have amassed nearly $10,000 in your down payment fund after one year.

Do you spend $4 for a latte on your way to work each day? At the end of a five-day work week, that’s $20. That’s another $1,000 a year savings if you brew your own coffee and pour it in a travel cup for the road.

The dress you spent $300 on to go to a friend’s wedding? You could have spent about 10 percent of that on a suitable substitute through a clothing rental service, such as Rent the Runway or Style Lend. Some of these companies pay for the return postage and dry cleaning, too.

Your buddies want to take a trip to Mexico this summer for some golf. Between the travel, hotel, food and greens fees, you estimate you’ll be spending $2,500. Counter with a staycation playing courses close to home, and top off the week with a fabulous dinner on Friday. Some of your cost-conscious friends undoubtedly will welcome the suggestion. If they don’t, consider gracefully opting out for the year, and put all of the savings straight into your down payment fund. (After all, it could be two fewer months living in your parents’ basement.)

3. Bring in more income.

In the gig economy, there’s a side job for everyone. Turn your skill or hobby into a side job.

Are you a high school English teacher, or an expert in statistics? Apply to be an online tutor with companies such as Studypool, Tutor Me or Tutor.com.

Love dogs? Contact your local pet day care center to see about working a few hours a week or working through them to find clients who need a dog walker. Apply online through companies like Rover.com, care.com and petsitter.com.

No time for a side hustle? There are still plenty of ways to save money without working. A variety of companies will give you rebates on purchases you make online or in-store. Ebates, Ibotta and Receipt Hog are popular, and you can get money back on purchases of everything from bacon to Bermuda shorts.

4. Save unexpected money.

In every life, a windfall comes from time to time. Your tax refund. A bonus at work. Lottery winnings. Cash from a golf tournament. Christmas money from Grandma. A check from Mom. None of that money is part of your monthly budget, but instead of splurging on new boots or upgrading your cellphone, put it away toward the single biggest purchase you’ll ever make. You’ll get to your down payment goal that much faster.

5. Sell things you’ll never use again.

We all have things we probably won’t ever use again. While you could make a few hundred dollars on a weekend throwing a garage sale to sell these items, it unquestionably takes time and effort. Thanks to today’s sales platforms, there are ways to make a bundle for a fraction of the effort: There are the standards, such as eBay, Amazon or Craigslist. And there are plenty of apps to try, like Wallapop, OfferUp and LetGo, as well as your local newspaper.

There’s no need to save the plaid sweater you haven’t worn or the guitar you haven’t picked up since high school. And do you really need that gym set that just takes up space? Your new home might be near a gym you can join, or better yet, see if your employer offers free gym memberships. Many of them do. So go ahead and de-clutter; it’s one less thing you’ll have to pack for your big move!

6. Temporarily reduce your retirement savings.

Saving for retirement is something you’ve been doing (or should be doing!) since you got your first full-time job, and while it’s tempting to stop contributing or drain the account when you want to buy a house, neither is advisable. There is a compromise, however.

If you have been putting $500 a month away in a retirement account, you could briefly trim that contribution. If you cut it in half for one year to $250 a month, you’d have $3,000 in your down payment account. After the specified, short-term period you’ve designated is up, make sure that you resume your retirement savings right away.

If you feel strongly that your retirement account is your best bet to fund your home, there are some exceptions to early IRA withdrawal rules for first-time homebuyers. Ask your financial advisor or tax professional for details.

Saving for a down payment may seem overwhelming, and while it does present challenges and sacrifices, remember that this lifestyle change isn’t forever. At the end of your journey, you’ll have the home of your dreams and all the benefits that come with it.

7. Consider a “piggyback” mortgage.

If you’re serious about buying now, and have not accumulated enough savings, another consideration is a “piggyback” mortgage. With this strategy, you borrow 80% of the home’s value with your primary mortgage loan, then take a loan for up to 15% for the down payment. (You supply the remaining funds from your savings.)

A piggyback loan offers several advantages for borrowers with good credit: You don’t have to delay purchasing a home until you have a 20% down payment in cash. Some lenders offer simultaneous closings using the documentation from your primary mortgage, so all of your financing is completed in one seamless transaction. Because you won’t have to pay for private mortgage insurance (PMI), you’ll have more money in your pocket each month. Plus, you have the flexibility to pay off your second mortgage at any time, whereas you are required to pay PMI until your outstanding loan balance is at least 80 percent of the home’s appraised value.

Saving for a down payment may seem overwhelming, and while it does present challenges and sacrifices, remember that this lifestyle change isn’t forever. At the end of your journey, you’ll have the home of your dreams and all the benefits that come with it.

Happy saving!