5 Steps to Start Saving For Your First Down Payment
As a first-time homebuyer, it’s easy to get overwhelmed by the many steps and details of the home buying process. There’s certainly a lot to think about, but in the words of Walt Disney: “The way to get started is to quit talking and begin doing.” Indeed, to achieve your goal of owning a home, you need to make home ownership a priority and start taking the necessary steps now (today) to make it happen. Don’t get overwhelmed by the process as a whole, and don’t wait until a major life change happens—like a new job—to start saving. Any small steps you take now will get you that much closer to your homeownership goals in the future. Take a look at the housing market in your target areas (websites like Realtor.com have searchable databases for home prices and real estate trends), get an idea of how much you’ll need for your down payment, and formulate a plan to start saving for it today. Here’s a step-by-step guide to getting you on your way.
Step 1: Check your credit score
This is where knowledge is power. Federal law requires each of the three nationwide consumer credit reporting companies—Equifax, Experian, and TransUnion—to give you a free credit report every 12 months if you ask for it. Request your free credit report(s) on AnnualCreditReport.com to make sure that your financial history is reported accurately, and to assess how you can improve your score if needed.
Step 2: Calculate your down payment
Once you have your credit score, you’ll be able to get a better estimate of your monthly mortgage rates and amount you’ll need for a down payment. Your bank or credit union can help you with this, or you can check out free down payment calculators on sites like SmartAsset and NerdWallet. Keep in mind: the higher your down payment, the lower your monthly mortgage payment will be, and the amount required for a down payment depends on your loan type.
Step 3: Establish a monthly budget
Once you have a better idea of what you need to save overall for your down payment, you can start budgeting your expenses to see how much money you can put aside each month. One way to create a budget is to use a spreadsheet (Bank of America even offers a free template) that starts with your net income (gross income minus taxes and other costs listed on your pay stub). Next, subtract your current monthly expenses (rent, student loans, car payments, utility or credit card bill) from your net income. From that point, determine how much money is left each month and start keeping a close eye on how much of it is spent on things like entertainment, groceries, dining out and gasoline. Then, see what you can cut back on. Can you start carpooling with a coworker? What happens if you cut back on takeout orders or restaurant dining? In many households, income and expenses are closely matched, so the only way to save is to cut back on spending habits or look for new ways of saving. Your budget may change over time and should be revisited periodically. Check out Simple Dollar for more tips on creating and maintaining budgets.
Step 4: Open a savings account and set up automatic deposits
Now that you have a better idea of how much you can realistically set aside each month for your down payment, it’s time to set up a place to put it! Open a savings account in person or online at the same bank or credit union where you currently do your checking. This way, you can transfer money from your checking to savings account easily—or better yet—if you have direct deposit, set up automatic deductions from each paycheck that go directly into your savings account. When it comes to saving, the out of sight/out of mind rule often rings true; you’re less likely to spend money that never landed in your checking account, to begin with.
Step 5: Check your interest rates
Has your financial situation improved since you opened your first credit card, but your interest rate stayed the same? If so, get on the phone and negotiate. Don’t wait for a bank or credit card company to offer you a better rate; reach out today to see what’s possible. Creditcards.com even offers a script to initiate the negotiation conversation, if you need help getting started. Now is the time to be your own best financial advocate.
To sum it all up,when saving for a down payment for your future home, don’t get intimidated by the overall process. Do your research, check your credit history and start taking small steps today to get you closer to your goals.
Have more questions about the home buying or selling process? Contact us and we’ll help you get on your way to homeownership.