Saving for a Down Payment:
A 6-Step Approach
Saving for a down payment is unlike saving for retirement; it requires a different set of strategies. The following six principles can help you save money quickly and prepare you to purchase your dream home:
Step 1: Determine how much you need to save.
- Determine how much money you need for a down payment by discovering how much money the bank will lend you for a mortgage, based on your income and credit score. The down payment is the difference between what the bank will loan you and what the house costs.
- Work with a lender to determine the amount of the loan you can get from the bank, then set a goal for a down payment.
- Note that you may discover that you need less—or more—than you thought you did.
Step 2: Decide when you want to buy.
- Determine how much money you need to save each month based on when you want to buy.
- If you can only manage to save a certain amount per month, you may need to delay your purchase, or consider other options such as down payment assistance programs or low-down payment loans.
Step 3: Determine where the money is coming from.
- Identify how much money you can save each month by reducing expenses, earning extra income, or selling items online.
- Determine if you can get a lump sum from annual bonuses or tax refunds.
Step 4: Set up an automatic savings system.
- Create a system that will automatically move money into savings each month.
- Ask your workplace to withdraw more from each paycheck and deposit the money into a savings account.
- If you’re working an extra job, have all that money go to a separate account.
- Make it routine, so you won’t have to think about it.
Step 5: Pay off credit cards and roll the payment over.
- Start paying extra on the credit card with the least left owing.
- Once you pay off that card, apply the entire payment you were making to the card with the next lowest balance.
- Once all of your cards are paid off, add up all the money you were paying each month and put it into your savings.
Step 6: Reward yourself along the way.
- Create a chart, like a thermometer, with your target at one end.
- Color in the money amount you save each month and watch it get closer to your target.
- Look for extra ways to add more to your thermometer each month.
- Don’t go buy anything more on credit for a good long while.
Conclusion:
Don’t let down payment money stop you from owning a house. Even if it can’t happen right away, that’s no reason not to plan for it down the road. Contact a mortgage broker or lender to talk about special down payment assistance programs.