Knowing how much house you can afford and automating savings can help you build a solid first home down payment.
Buying a first home is a milestone event, whether you're just starting out or you have decided to finally buy after a lifetime of renting. Achieving this financial feat requires saving enough money for a down payment on the purchase price to qualify for a mortgage. That can be an intimidating prospect for many first-time home buyers, especially if you're unsure how much you need to save or have misconceptions about the size of the down payment required.
Creating a plan for how to save that money—and establishing a dedicated savings account to do so—can reduce the stress associated with achieving that goal and make your success more likely. The following 8 saving strategies can guide you on how to start saving for your first home down payment:
1. Understand How Much You Need to Save
The purchase price of your home, your income, and the terms of your mortgage will be factors in determining the required down payment, which can be in a wide range of percentages. A mortgage backed by the Federal Housing Administration (FHA), for example, can require as little as 3.5% down plus closing costs.
As a first step in your information gathering, you can consult Fifth Third's mortgage affordability calculator to help you determine how expensive a home you can afford, based on what you earn, your existing debt, interest rates, and other factors.
2. Research How Loans Impact Your Down Payment
Even if you're not quite ready to apply for a mortgage, researching the types of loans available provides more information about how much you need to save. Multiple loan programs provide down payment assistance or support to make purchasing a home easier. These include:
- FHA loans. Designed with first-time buyers in mind, the minimum down payment on FHA loans is 3.5%, and the loans are available to buyers with qualifying incomes.
- VA loans. These loans are available to veterans or active duty U.S. military looking to purchase or refinance a house. VA loans provide flexible loan terms and require little to no down payment.
- A community mortgage loan. These loans are designed to make homeownership more affordable for more people. Community mortgages allow consumers to put as little as 3% down, and the loan may also cover some closing costs.
- Home Possible and HomeReady mortgages. These loans were developed by the federal government mortgage agencies, Freddie Mac and Fannie Mae, to improve access to mortgage products for first-time home buyers, retirees, and those with significant debt or lower incomes. Home Possible and HomeReady mortgages offer reduced down payment options and fixed interest rates.
- Physician mortgage loans. Created for new and established dentists, veterinarians and doctors, physician mortgages enable these professionals to finance up to $750,000 for a home purchase with no down payment required. The loans may also eliminate the need for private mortgage insurance, which can help decrease the overall monthly payment.
3. Establish Your Budget
With a solid understanding of how much you will need for a down payment, you can begin to plan how to save the extra cash. Review your household budget with an eye toward your monthly income and expenses. First, look for places where you can make easy cuts. For instance, you may be able to cut subscriptions to various online or TV streaming services and save an extra $100 a month. Connect with your car insurance or internet service provider to see if you can negotiate a lower monthly fee. Or, if you have debt, consider consolidating your credit cards into one monthly payment at the lowest interest rate possible. As expected, you can also evaluate your discretionary expenses and reduce your spending to save even more. Decide to only eat out on special occasions, freeze how much you spend on clothes or vacations, or even look for ways to cut your grocery bills.
4. Open a Savings Account
What’s a great idea on how to save money for a house? You'll want to create a designated savings account for your down payment. This creates a natural barrier between the money you use to live and the money you want to save. Look for a savings account that helps streamline your efforts to save and speeds up your progress. For instance, a Fifth Third Momentum® Savings Account enables you to set a savings goal and dedicate funds toward it. Fifth Third Momentum accounts have no monthly service charges, provided that you maintain a balance of $500 or more and have a Fifth Third Momentum® Checking Account. By eliminating extra fees, you can ensure that all your hard-earned savings go toward your down payment goal.
5. Set a Saving Timeline
In addition to knowing how much you want to save, you should also consider creating a timeline for your effort. Establishing a timeline will make it easier to track your progress, whether you're anticipating saving aggressively for one year or moderately for several years. For instance, say you want to save $20,000 for a down payment, and you earn $90,000 a year. If you can save 10% of your income—about $750 each month—you'll reach your goal in just over two years. A timeline can also help you maintain motivation. For example, if you decide on an aggressive saving plan, then knowing there is an end date to the sacrifices you're making to save more can make them more sustainable. Fortunately, there's no rule for when or at what age you start saving for a first home. You might begin casually setting aside money in college or once you land your first job. But you may also consider purchasing a home after years or decades of renting.
6. Automate Your Home Down Payment Savings
Once you start on a savings goal, you want to do everything you can to make saving money effortless. Automating your savings does just this. With a Fifth Third Momentum® Savings Account, you can use Scheduled Savings to choose how much you want to save each month and automatically schedule those funds to transfer into your savings account. With the Smart Savings feature, you can also automatically save small amounts of money—rounding up on purchases, for example. There are multiple benefits to putting your savings on autopilot. For instance, Scheduled Savings ensures that your savings remain a priority and doesn't get pushed aside due to impulse purchases or unexpected expenses. As you find additional ways to save—maybe you cut a streaming service, or your children need less child care because they're now in school—you can also automate those savings to deposit into your account. You're already used to spending that money, but now instead of going out that door, those funds are getting you that much closer to your homeownership dreams.
7. Stash Your Windfalls
When it comes to saving for a big goal like a down payment on a home, one of the best feelings is getting ahead of your plan. Stashing financial windfalls makes that possible. Look for opportunities to save additional money you receive that is not part of your regular income. For instance, if you have a small side business as a house sitter, putting the funds you earn directly into your down payment savings account will ensure you reach your goal much faster. Sock away any bonuses from your employer, cash you may receive as a gift, or even tax refunds from the IRS. Every cent you can dedicate to your down payment puts you that much closer to your down payment goal, and stashing windfalls helps you do so without impacting your usual budget.
8. Look for Ways to Cut Current Expenses
Finally, if you've done all of the above and you want to ramp up your savings even more, look for more powerful ways to reduce your expenses. For instance, you might consider cutting your living expenses by taking on a roommate or moving into a smaller or less expensive home or apartment. Decreasing your current housing costs by even 20% allows you to save that much more rapidly. Motivated savers might also consider selling some of their more valuable possessions, trading in a newer car for a more affordable vehicle that doesn't require a monthly payment, or eliminating all unnecessary travel for a certain amount of time.
Saving for the down payment on your first home is an exciting goal, but it takes some planning. You can create a down payment savings strategy by understanding how much you need to save and the mortgage options available. Reviewing your budget and making cuts to your expenses—both painless cuts and more dramatic ones—can help you find the means to save more money at a faster rate. And using a Fifth Third dedicated savings account with features that enhance your efforts only helps you reach your down payment goal that much faster.
If you would like more information about mortgages, contact a Fifth Third mortgage specialist here.