Saving for a mortgage is simple but not easy. For many looking to transition from Renter to Homeowner, saving for a down payment and closing costs seems an impossible hill to climb. Luckily, there are loan programs available now that make saving for a home much more manageable for the average American. Even with these programs, the prospective home buyer is expected to come up with at least 3.5% in down payment and around 4% for closing costs. For a $250,0000 home, that’s $18,750 in down payment and closing costs. So, how do we get there? Again, it’s simple but not easy. Saving for a home is exactly that -- saving. We all know what it means but so many of us struggle to put it into practice.
First, decide where you will put the money you’re saving and don’t touch it. Pretend that this money doesn’t exist. If your bank allows you to split up money in different pools or sub-accounts, do that. If not, try setting up a separate savings account. Whether it’s with your current bank or a different one, the idea is to make it harder to touch the money. If it takes a few days for transfers to be completed, you’ll be less likely to dip into your savings for impulse buys.
Ready for the hard part? Next, cut down your monthly debts. There are online subscriptions for everything, all of which are great for silently draining your bank account. Decide which ones are absolutely necessary, cancel the others, and reroute that money to your new savings account. If you have a car payment that takes a significant portion of your monthly income, consider trading it in for one with a lower payment. Credit cards are great for things like gas and groceries but not for unnecessary purchases. Be sure to keep your balance under ⅓ of your credit limit -- this will build your credit score and help you get a better interest rate on your future mortgage. One thing that many of us have learned to do in the past year is cooking at home. If you’re included in that group, you’ve probably noticed the impact it has had on your bank account. Keep it up! Come up with a few staple recipes that use similar ingredients and are easy to prepare. Buying in bulk is usually cheaper. Although the savings per purchase are small, they’ll add up over the course of a few months.
Here’s some good news: the habits you’ll develop to save for your home are the same ones you’ll need to actually get approved! There are plenty of people who have enough money saved for both a down payment and the closing costs but, because of their recurring monthly debts, they don’t qualify for the home they want. Saving is a decision to shift your mindset. It takes some discipline and creativity but once you start building the habit, the monthly savings will snowball and you’ll be shopping for your new home in no time!