How to Save for a Down Payment on a House: A First-Time Home Buyer’s Guide

Whether you’re dreaming of a modern multi-family residence or a spacious single-family home with plenty of bedrooms and outdoor space, everyone starts at the same point: saving for a down payment. For first-time home buyers, starting from scratch can be a rewarding challenge, since pooling together a significant portion of the home’s total cost is a major milestone on the path to homeownership. With a few tips and a solid saving plan in place, saving for a down payment is much more doable than it seems.

 

Understanding Down Payments

In order to save the proper amount, it’s helpful to understand exactly what a down payment is. Since the vast majority of homebuyers require lending to purchase their home, lenders require a portion of the home’s total cost at the time of closing. This can range anywhere from 0% to 20% for a primary residence and the specific amount is determined by the type of mortgage the buyer chooses. The function of this initial investment from the buyer is to lower the lender’s risk in the event the buyer can no longer make mortgage payments. The second function of a down payment is to lower the amount of the loan and help determine the interest rate. The higher the down payment, the smaller the loan amount which generally also results in a lower interest rate.

 

Do First-time Homebuyers Need a Down Payment?

The need for a down payment for first-time homebuyers depends on several factors, including the state where the home is being purchased and the type of loan the buyer is using. There are programs varying from state to state designed to aid the down payment requirements for qualifying buyers like veterans, buyers earning under a certain annual income, and first-time homebuyers. Check with a lender to discover what programs might apply to your specific circumstances.

How Much Should I Save?

There are several factors involved in determining the amount you’ll need to save for your down payment, including total cost of home, specific loan programs like the first-time homebuyer loans mentioned above, as well as the parameters and preferences you set for your home loan. In addition to the amount that’s required for your home purchase, also consider what kind of down payment serves you best financially in the long run. A larger down payment can bring down the principal of your loan which lowers the number of mortgage payments and potentially yields significant savings in interest. However, keep in mind the cost of delaying your home purchase in order to save up more. Are you spending more on rent by not purchasing a home? Weigh the pros and cons along with the requirements of your chosen lending program before landing on a specific down payment goal.

 

How to Leverage Assistance Programs

There’s no substitute for working with a lender to make your home-ownership dream come true and the ability to leverage down payment assistance programs is further proof. Because first-time homebuyers and other qualifying groups are offered government grants, loans, matched savings, and other programs to help with securing a down payment. Your lender can help identify which programs apply to you and can help you secure the best option before you even begin house-hunting.

 

Creating a Savings Plan

So you’ve done your research and feel confident about the amount you’ll need to put down on your dream home. Now set in place a savings plan to reach your savings goal that’s realistic for your finances. This plan might include anything from assessing your spending habits to making compromises on your new home wish list to bring down the total purchase price you’ll be borrowing.

 

Reducing Expenses

Trimming your outgo wherever possible will help you allocate more to your down payment savings and bring moving day even closer. Reducing expenses can range anywhere from small changes like brewing coffee at home and packing a lunch everyday, to major adjustments like moving in with relatives or downsizing your rental to reduce your housing expenses. Everyone’s budget is different but be sure you’re making your down payment a priority.

Whether you choose to spend less, earn more, or employ every possible program available to you in order to reach your down payment goal, a clear plan and a little diligence will make the dream of homeownership a reality much sooner than expected. Explore New Home Co.’s homeowner resources and begin your down payment savings journey today.