Do you dream of being a homeowner? Moving into a new apartment or family home is something that we all think about and deserve.
Statistics show that home ownership is on the decline in the United States, with more millennials choosing the rent rather than purchase real estate.
Research into the reasons why millennials are struggling to afford a home shows that they cannot save to meet the initial cost of the down payment, as well as the closing costs surrounding the transaction.
Many millennials live paycheck-to-paycheck, and few of them save any money they earn. Instead, they choose to spend their earnings on their lifestyle.
However, if you’re one of the few millennials that believe in the power of owning real estate, then you are on the right path to financial success.
A home is one of the first assets you’ll acquire as an adult, and it provides you with a way to get ahead financially in life.
If you’re currently struggling to find the money to afford your down payment, don’t give up. If you are diligent with your finances and get your spending in check, you’ll have enough money to afford a down payment on a home in as little as a year or two.
We put together this guide to saving for a down payment, giving you the chance to make your home ownership dreams come true.
Analyze your Goal and Set a Target
The first thing you need to do when saving is to understand the exact amount that you need for your down payment. By writing down your goal, and focusing on the outcome, it programs your subconscious mind to alter your behavior.
To calculate your down payment size, you’ll have to take into account three factors. The first is your desired loan-to-value ratio, (LTV), the second is the timeline or when you want to buy, and the third factor is the local market conditions in the area.
When people decide to buy a home, the first thing they focus on is typically the price. However, this approach is the wrong way of looking at things. Instead of focusing on the list price, you should only take into account the size of the down payment.
You’ll need to save approximately 20-percent of the list value for your down payment. Therefore, if you’re thinking about purchasing a $200,00 home, you’ll need to have $40,000 available for the down payment, which is a significant sum for anyone to afford.
The highest end of the affordability range is the biggest down payment you can afford to save in your allotted time frame, without undershooting the target loan-to-value ratio. Therefore, if you want to purchase a $200,000 house, with a 20-percent down payment in the next two years, you’ll need to have $40,000 available at the end of your 24-month time horizon.
This strategy equates to savings of $1,666.70 per month, to achieve your goal in the allotted time frame. If you can’t afford this savings rate, then you’ll need to either adjust your target price range or increase your income to allow you to save.
Savings Vehicles for a Down Payment
One of the best methods of saving for a down payment is to put your money out of reach. This strategy helps to avoid the temptation to dig into your funds for lifestyle expenses. If you’ve always wanted to visit Bali, and someone offers you the opportunity to join them on a trip to the island nation, then the temptation to dig into your savings may derail your progress.
When you are making progress to your goal, it may not seem like a big deal to dip into your savings for a few thousand dollars to go on vacation. However, it diminishes your focus, and confuses your subconscious, causing you to be less enthusiastic about your commitment to your down payment. As a result, you’ll find yourself spending more and more of your finds, setting you back in your savings.
It’s best to avoid this temptation by putting your money out of reach. Open a 24-month CD with your bank, and commit to paying them a specified amount every month for the duration of your savings timeline. CDs are powerful savings instruments that offer significantly higher interest rates than savings accounts.
With a CD, you are benefiting from the power of compound interest. Compound interest earns interest – on both your interest and your deposits. This interest may start small, but it ends of paying you more in returns than you would get from sticking your money in your checking account every month.
However, when you open a CD, you commit to paying the bank every month, and you also set the intention never to withdraw funds early. Banks rely on your commitment to your CD every month, and if you dip into the account to remove your savings before the maturity date, then the bank penalizes you severely for doing so.
If you know that the bank is going to take you hard-earned cash in penalty fees for early withdrawal, then you are less likely to give in to the temptation to withdraw. The vacation may sound like fun, but you have goals to achieve, remember?
Check Your Credit Score
When lenders evaluate you for a home loan, they are interested in your credit report. The three big credit bureaus, TransUnion, Experian, and Equifax, collect data from credit reporting agencies every month and use that to calculate your credit score.
When it comes time to apply for a mortgage, your credit score could mean the difference between a 10-percent or 20-percent down payment on your new home. Your credit score consists of five weighted factors; How much credit you have outstanding, the age of your credit accounts, your payment history, hard inquiries on your credit report, and your debt-to-income ratio.
If your credit score is below 580, you’re in the subprime territory, and banks will hesitate to loan you money for a mortgage, even with a substantial down payment. If you are between 581 and 700, you have an average credit score and can expect to pay a 20-percent down payment on your home.
Scores between 701 and 800 are considered as good by lenders, and they may offer you a better APR on your financing, but you can expect to pay a 20-percent down payment. If you have an 800+ credit score, you are at the top of the heap, and lenders will fall over themselves to secure your business.
With an 800+ credit score, you have more room to negotiate with the lenders, and you may find that it’s possible to secure a 15-percent or 10-percent down payment, reducing your upfront financial contribution to your mortgage.
Request a free copy of your credit report from one of the bureaus, and evaluate areas you need to work on to bring up your credit score.
Reduce Your Debt Levels
The chances are you’ve heard the advice to reduce your debt levels with your creditors. If you’re maxing out your credit card every month or struggling to meet your monthly payments, then you need to make a proactive attempt at reeling in your debt.
As mentioned, one of the primary factors contributing to your credit score is your debt-to-income ratio. Lenders and the credit bureaus don’t like to see DTIs of over 30-percent. This ratio means that if you have a $6,000 salary, you cannot have more than $2,000 in monthly debt repayments, or your credit score will suffer.
If your credit card has a $6,000 limit, then you’ll need to ensure that you have less than $2,000 outstanding on the facility. By taking this approach, your credit score will dramatically improve in a matter of months, provided you stay within the recommended guidelines.
Reducing your debt also gives you more free cash flow to save toward your down payment. The more cash you have in your savings account or CD, the faster you’ll achieve your goal, and you can either reduce your timeline for making your down payment or increase the list price of the real estate you’re considering.
Set Your Tax Refund Aside and Save Your Pennies
Are you one of the millions of Americans getting a tax refund this year? Instead of spending your refund, put it to productive use. Sure, take yourself and your partner out for a nice meal to celebrate, and then stack the rest away where it goes toward your down payment.
If you get a $500 to $1,000 tax refund every year, spend 10-percent and stash the rest away, you could have a significant sum to go toward your down payment.
If you have a transaction account with your bank, you’ve probably noticed that you receive cashback after the bank is dome processing your payment. While it’s only a few dollars every month, if you attribute this to your savings, then it adds up over 24-months.
Likewise, store all the change you get from your groceries in a jar and keep it out of view under the sink. You’ll be surprised how much change you get back over a year. Most of us never realize how much of our money slips through our fingers or ends up in the hands of others that don’t need it as much as we do.
Save Your Cash Back Rewards
If your credit card has a cashback rewards program, then use this facility to contribute toward your savings. If you don’t have a credit card offering this type of rewards program, then close your existing account and open another credit card facility with a lender that does.
Research shows that two-thirds of Americans who use a credit card rewards program choose to take the cashback option. Getting cashback on your spending is like receiving free money – well, almost.
However, you’ll need to ensure that you pay your credit card balance off in full every month to leverage the power of this rewards facility. Credit card APRs are sky-high, with the average rate being between 17 to 20-percent for those individuals with decent credit scores.
If you leave your outstanding balance in your account and only pay off the minimum balance every month, then the cashback rewards won’t make up for the interest you’re paying on your facility, and its best to halt spending on your card until you get your finances under control.
Increase Your Income
If you’re struggling to pay bills and save toward your down payment, even after using the strategies mentioned above, then it’s time to look for means to increase your income. What do you do in your spare time? If you come home from work and spend the evening on the couch playing video games or relaxing with your partner in from of the TV, then you are burning time.
While you’re young, you have abundant energy that you can use to get ahead in life. Instead of spending time on the couch, get a part-time job to help you save toward your down payment goal. There are hundreds of ways to earn more money, and you can find plenty of them available online.
Freelance to increase your monthly earnings. You could write or proofread articles, take surveys, or even drive for Uber in the evenings. Earning just $10 to $50 extra every day could give you enough to reach your goal.
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In Closing – Budget Your Way Over the Finish Line
As a final tip on our list, do you run a budget? Calculating how much money you have coming in, versus how much money goes out every month is a valuable exercise. Budgeting shows you areas where you can cut back on your expenses. Do you need that second streaming subscription? Maybe you could eat out fewer times in the month?
Examine your expenses and look for ways to cut back, and apply these savings toward your goal. All it takes is time and persistence, and you’ll have enough for your down payment in less time than you thought.