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Homeownership has long been a central part of the American Dream. But following the financial crisis of 2008, it’s safe to say that that dream has become largely out of reach for many. With the rising cost of living — including increasing house prices, soaring rents, stagnant wage growth and mounting student loan debt — buying a home today is tremendously challenging, if not all but impossible in some areas. It’s no surprise then that more U.S. households today are renting than at any point in the last 50 years, with homeownership recently reaching its lowest point since 1967.
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For many prospective homebuyers, down payments are considered to be the biggest impediment to homeownership. In fact, in a 2017 survey from the Urban Institute, 53% of renters said that a down payment was a primary obstacle keeping them from buying a home.
For any first-time buyer, saving for a down payment can seem impossible. But there are a number of ways to make saving up easier, putting homeownership within your reach. Here are a few tips for saving up now:
Be Informed About The Down Payment
As a real estate agent, I find that misinformation regarding down payments is prevalent. I often meet with prospective buyers who either drastically overestimate what they need for a down payment, or conversely, underestimate it. My advice is to make sure you’re clear on what you’ll be paying, and then start working toward that specific goal. Take a look at homes for sale in the area where you’re hoping to buy, and play around with online down payment calculators to determine what you’ll be looking at for a down payment.
While a 20% down payment is common, many banks allow less — many first-time buyers even qualify for as little as 3% down through GSE-backed loans, or 3.5% through an FHA loan. VA loans for veterans and active service members can be obtained with a 0% down payment.
Just bear in mind that even a small down payment could still be costly. A 5% down payment on a $250,000 home is still $12,500.
You should also keep in mind that in most cases, a smaller down payment generally incurs greater risk, which means higher mortgage insurance and higher payments. While some first-time homebuyers are able to avoid mortgage insurance if they have exceptional credit, be sure to check with your bank to see which type of loan you’d qualify for —along with the interest rate and expected cost of mortgage insurance.
Be Realistic About The Costs
Many first-time homebuyers also tend to underestimate the other costs that are involved in buying a home. But being clear from the start can help to give you a realistic figure to save toward.
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It’s important to note that the cost of inspections or due diligence items is not included in the lender’s estimate of closing costs. Inspections can run $300 to $750 depending on the size of the home and the number of inspections the home needs. Radon tests, mold testing and septic inspections (just to name a few) are all additional inspections that homebuyers can opt to have, and in some cases, they may even be required. These are all things that you’d be responsible for paying for.
It’s also important to understand the difference between prepaid costs (which include taxes, insurance and prepaid interest) and closing costs (which include lender and title fees). Buyers are responsible for both.
Then there are the usual costs of moving, and additional expenses that are involved when moving into a new home. It’s a good idea for homebuyers to have an extra $4,000-$5,000 in the bank when buying a home.
Start Saving Early
Money from family members is a classic way for first-time buyers to get their feet on the property ladder, with nearly 25% of young, first-time homebuyers using a gift from friends or family as a down payment on a home, according to a 2017 National Association of Realtors report.
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Of course, if you don’t have a gifted down payment, there’s no need to fret. There are plenty of other options available that can help to make saving for a down payment easier.
When it comes to saving for a down payment, your best option is to get started early. Consider automated savings plans, savings apps or redirecting tax refunds into a separate savings account to help you reach your goal more quickly. You’ll also want to consider starting your down payment fund with a windfall — a bonus or other lump sum can help your savings to gain momentum, which could motivate you to build your savings higher.
Don’t forget about conventional savings tips: Looking to free up money that you can then redirect into your savings fund can help you to grow the balance even higher. Continue to drive an older car even after the balance is paid off instead of trading it in for a new one, or look into refinancing student loan debt to secure a better interest rate.
Research Assistance Programs On Federal, State, And Local Levels
In addition to federal programs, there are often state programs available for first-time buyers. Benefits include down payment assistance, closing cost assistance, tax credits and more. You’ll also want to check if your municipality and state offer any assistance for first-time homebuyers. Just keep in mind that in most cases, assistance comes with a price. Interest rates may be higher, and closing costs are often higher as well, so be sure to do your research before opting into a program.
While buying your first home can be daunting, it doesn’t have to be. And there are a number of programs that are available today to help first-time buyers. By being informed, looking into every option and taking advantage of help that’s available, your dream of homeownership could be closer than you think.
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