As the housing market continues to get stronger, many thousands of people will be shopping for new homes this summer. As night follows day, the age-old question will surface for many of them: “How do I come up with enough money for a down payment?” Depending on your credit rating, income, savings habits, other financial obligations and a host of other factors, this could be the most difficult step in the home buying process.
Unfortunately, younger people and newly-married couples often get frustrated at this point and end up discouraged about the idea of home ownership. It doesn’t have to be that way! Financial experts say that just about anyone can create a savings plan that will allow them to purchase a home within five years or less. Here are some helpful strategies suggested by the Washington Post’s financial team for anyone who wants to take the first step toward owning a home:
- Be mentally prepared: Think in terms of saving between 5 percent and 25 percent of your future home’s purchase price. Depending on your income level and what type of government loan programs you can qualify for, you will likely need at least 3-6 percent as a down payment. More affluent buyers will usually need more than that.
- Downsize: If you are truly serious about saving for a home, see how you can downsize your current lifestyle. Do you really need two cars? Could you manage living in a smaller apartment? Are there some obvious monthly budget items you could eliminate or reduce (like meals out, weekend trips or entertainment)? Most people can find some “pork” in their monthly budgets that can be put toward a future down payment.
- Second job: Do you or your spouse have enough free time to take on a second job, even for 10 or 20 hours per week? Some young couples use the idea of “micro-jobs” to save money. For example, husband and wife each find a 10-hours-per-week job whose income is earmarked for the down payment fund.
- Automatic paycheck deductions: Whatever you decide that you can save from each paycheck, have your bank or employer set up an automatic deduction/deposit, whereby a portion of each check goes into the down payment account.
- IRA loans: You can, in most cases, borrow from your IRA without penalty. The laws covering this activity are a bit complicated, but borrowing from your IRA can be an effective way to come up with a portion of your down payment.
Whether your income is high or low, consider opening a separate savings account specifically designated for down payment money. Get in the habit of putting something (anything!) into the account, and you will at least have the mechanism in place for purchasing your first home. Good luck.