If you’re thinking about buying a home, you’re probably also thinking about how to save for a down payment. For many Americans, it can be a scary prospect. How much do you really need to save for a down payment before making a home purchase? What steps can you take to successfully set aside funds for your future down payment?
How to Save for a Down Payment
Traditionally, aspiring homebuyers were advised that they had to have a 20-percent down payment in order to purchase a home, but today’s numbers paint a strikingly different picture. HousingWire reports that the median home price in the U.S. in 2018 was $270,000. Meanwhile, the median down payment was $15,490, which is just 5.37 percent of the median home price. In fact, nearly 70 percent of the home purchases included in the study’s data were completed with down payments of less than 20 percent. Clearly, you don’t need a 20-percent down payment to become a homeowner.
Sizing Up Your Down Payment
If 20 percent isn’t really the benchmark, how much of a down payment do you really need? According to The Balance, that depends on the type of loan you plan to use. Borrowers using a conventional mortgage will generally need a down payment equal to at least 5 percent of their purchase price. Borrowers who opt for an FHA loan will need to have a minimum of 3.5 percent. People using a VA loan can purchase a home with no down payment at all!
Why is the idea of a 20-percent down payment so persistent? It may be tied to the requirements for private mortgage insurance, or PMI. As the Consumer Financial Protection Bureau explains, PMI is a type of insurance that protects the lender in the event that a borrower defaults. Homebuyers using conventional loans must pay for PMI if they make a down payment of less than 20 percent.
Handy Tips for How to Save for a Down Payment
If you’re ready to start saving for a down payment, BestWalletHacks offers a few tips:
- Don’t just save for a down payment. Life doesn’t stop while you save for a down payment. High-interest debt like credit card debt can snowball quickly. Expensive emergencies and inevitable replacements will need to be handled. Be smart about your saving. Plan to get your debt under control, maintain a healthy emergency fund, prepare for planned expenditures, and save for your down payment. If you don’t, you may see your down payment fund drained by other needs.
- Put your down payment savings in a safe place. While it may be tempting to try and build your down payment fund fast by plunging into something that seems to promise a high rate of return, you’re better off putting your money in a safe, short-term investment like a savings account. However, you don’t want to tuck it into the same account that holds your spending money or rainy day fund. To limit the temptation to reroute your future down payment for other purposes, set up a dedicated account.
- Increase income. Get a second job, work overtime, or sell items you no longer need to increase the speed of your savings. If you receive a windfall like an inheritance, cash gift, bonus, or tax return, put that money in your down payment fund.
- Decrease expenses. Downsize your living arrangements, eat at home more often, cut out cable, or freeze your spending so that you can save more.
- Search for missing money. Governments often have unclaimed cash sitting in their accounts because they don’t know where to send it. If you search, you might find nothing, or you might discover you’re owed a substantial sum.
- Automate your savings. Saving can sting if you’re constantly thinking about it. Automating your savings with apps that shift small sums of money to your saving account can be a painless way to save more.
Which home loan program is the right fit for your needs? PrimeLending Twin Cities can help you explore your options and find the ideal mortgage for your homeownership goals. Contact us today to get started.