These days, pursuing the American Dream of owning your own home isn’t so easy. However, despite the challenges associated with saving for a down payment, and the high cost of housing in certain markets, most Americans still want to own their own home. Some call it a biological urge, based on our human desire to nest. According to former Housing and Urban Development Secretary Shaun Donovan, Americans are still determined when it comes to home ownership. “Americans continue to want to be homeowners and they want to do it in a more careful and responsible way given the crisis that we’ve been through, but there is no evidence that we’re going to abandon the home ownership society.” And as American’s interest in home buying inches up near 2006 levels, the biggest hurdle is saving for a down payment.
A common misconception seems to be the belief that one can only buy a home if they have 20% of the purchase price for a down payment, which just isn’t the case. Many loans require only 10%, or in some cases, even lower amounts. In general, 20% or more for a down payment can speed up your loan approval process. Regardless of the percentage that you’re considering putting down, here are some tips to save up for the down payment.
1. Determine How Much House You Can Afford
The first step is to set your savings goal. Online research will reveal home prices in your area and determine how much you can afford. Loan calculators can be found on most bank websites and on the FHA site at www.fha.gov . The median price of existing homes in the U.S. is around $200,000 according to the National Association of Realtors. A 5% down payment for a home of that price would be $10,000. A 20% down payment would be $40,000. If you’re able to save 20%, lenders will not require you to purchase Private Mortgage Insurance, which will reduce your monthly expenses.
2. Set Up a Savings Plan
You should create a savings plan and set a deadline for reaching your down payment goal. ONE prudent strategy is to calculate the difference between your current housing costs and your projected monthly mortgage payment. Start by putting that amount away each month. This system has the advantage of allowing you to decide if you really earn enough to afford the home you want. In some cases, if you’re paying a low rent, doubling that payment can be quite a shock, even if the bank says, ‘You meet our guidelines,’. In addition, open a separate savings account for your down payment. This helps to minimize the temptation to use your would-be savings for other needs. Setting up automatic transfers to your new savings account will lessen the chance you’ll spend the money elsewhere.
3. Explore Your IRA
Did you know first-time homebuyers can cash out up to $10,000 from an IRA without having to pay the standard 10% early withdrawal fee? If you’ve been saving or contributing to an IRA, check your balance and consider cashing out part of the money to put toward your down payment. You can find out more about the rules for this type of withdrawal at www.irs.gov.
4. Throw a Garage Sale
You may be surprised how much money you can make through a garage sale. It probably won’t be enough to fund your whole down payment (unfortunately), but garage sale profits can get you started. Some items may sell better on eBay or Craigslist, such as used bikes, or expensive musical instruments. Many items, such as clothes that you might normally donate to Goodwill or the Salvation Army can be money-makers at a garage sale.
5. Reduce Your Expenses and Save Cash
Review your spending habits and determine where you can find extra cash. Although this savings strategy may seem pretty obvious, you’d be surprised how much you can save each month simply be making a concerted effort to cut-back on unnecessary expenditures. Start by putting away the credit cards. Then cut out cable TV and switch to one of the less expensive channel subscription options. Switch to a less expensive cell phone plan if possible. Re-examine other aspects of your spending until you’ve pared back to just the necessities. Use coupons at the grocery store and try to postpone purchases that can wait. This strategy may not be fun in the short term but it will dramatically help you to save for a down payment. There are dozens of books and blogs you can turn to for money saving and living advice that can help accelerate your savings.
There are a host of other strategies and tactics for saving up for that down payment, but perhaps the most important tip of all is to set a goal, devise a plan, and stay on course! Time moves by quickly and if you tap into these tips, chances are you’ll be ready to make your ‘American Dream’ a reality sooner than you think. Looking for ideas on how prep your home for the summer before it’s too late? Then check out Get Your Home Ready for Summer.