Getting the Most out of Life
Saving for a Down Payment on a House? It’s Not as Impossible as It Seems
Your friends are starting to buy homes, and you’re left scratching your head. Where do people get the money for a down payment on a house?
A 20 percent down payment on a $250,000 home is $50,000, which is higher than the annual salary of most Millennials. If you made $50,000 a year and saved 10 percent of your pre-tax income, it would still take you a decade to put away that much money.
What can you do? Are you doomed to be a renter for the rest of your life? How on earth can you afford the down payment?
Here are a few tips for aspiring first-time homebuyers:
Sure, saving 10 percent of your income might feel like a lot of money, especially when the average American savings rate has hovered between 2 and 6 percent since the turn of the 21st century. Given that you’re saving for one of the biggest purchases in your life, can you temporarily turn up the dial on your savings? Socking away 20, 30, or even 40 percent of your paycheck will make a big difference.
Living this frugally may take some drastic measures. Getting a roommate, for example, can lower your rent costs by $500–900 per month, depending on where you live. Switching to the most basic cellphone (that is, not a smartphone) can save you $50–100 per month. Choosing a simpler diet without expensive meats could trim $100 from your monthly grocery bill. Paying off credit cards and other debts will help, too.
Boost Your Income
At your full-time job, focus on being the best employee possible. Take the initiative and say “yes” to opportunities, showing your bosses how valuable you are to the company. When it comes time for your annual performance review, don’t hesitate to politely but firmly ask for a raise.
In addition, try taking on some extra work on the side. Pick up freelance or consulting roles within your industry, or take on odd jobs such as waiting tables, babysitting, landscaping, data entry, or virtual assistant work.
Just two or three shifts per week can add up to a lot of extra cash over time, all of which (after taxes) can go into your down payment fund.
Look at Alternative Options
You don’t necessarily need to put down 20 percent. Here are three potential ways to reduce your out-of-pocket costs:
- Many conventional lenders will grant you a loan with only 10 percent down. You’ll need to pay for private mortgage insurance (PMI), a monthly fee that is added onto your mortgage. PMI typically ranges from 0.3 to 1.15 percent of your total loan amount, or $50–100 per month for every $100,000 you borrow.
- If you’re a member of the armed services, a veteran, or the un-remarried spouse of a deceased service member, try a Veterans Affairs (VA) loan, which is issued by a conventional lender but guaranteed by the U.S. Department of Veterans Affairs. These loans allow qualified individuals to buy a home with no money down.
- You might qualify for an FHA loan, which is backed by the Federal Housing Administration and often available to first-time homebuyers. These loans allow you to purchase a home with as little as 3.5 percent down, though you’ll have to pay a mortgage insurance premium (MIP), which is similar to PMI.
The amount of money required for a down payment on a house is so large that accumulating it can seem next to impossible. But with good planning, some lifestyle adjustments, and lots of hard work, your dream of homeownership is far more attainable than you think.
Paula Pant is the founder of award-winning website AffordAnything.com and a journalist and blogger specializing in personal finance, real estate and lifestyle design. She has been featured more than three dozen publications, including Forbes, DailyFinance, Marketplace Money, Business Insider, Inc. Magazine, and many more.