How to save for a down payment: 7 tactics for success

If owning a home is an important long-term goal, saving money now for a down payment later can help you get there. Once you determine how much you need to save for a down payment and other homebuying expenses, follow these tips to start saving today.

While there are minimum down payment requirements for most loans, you can always pay more. Pros of a larger down payment can include better mortgage terms. However, there is a potential downside. When you weigh the costs of buying over renting, it may be financially advantageous to buy now instead of waiting until you’ve saved more for an up-front payment. Also, consider how much you’ll need to set aside for other common homebuying expenses. You’ll need enough funds to cover closing costs, including property taxes and homeowner’s insurance, moving expenses, and potentially discount points.

Once you’ve built a budget and know how much you make and spend, you can tackle reducing your expenses to save for a down payment.

• 1. Build a budget

  The road to saving for a down payment starts with making a budget then sticking to it. By creating a spending plan, you’ll know how much you can set aside each month for a down payment while still having enough left for necessities. When preparing a budget, you need to know two essential things—what comes in and what goes out. Start by determining your monthly take-home pay after taxes and any other deductions. Next, assemble two to three months’ worth of expenses. Then follow these remaining six steps for setting up a budget. If you need additional help, try a budgeting app that connects to your bank and credit card accounts and tracks your spending.

• 2. Go for your goal

  Once you’ve built your budget, set a specific and realistic monthly down payment savings goal. Be sure your goal has a deadline and revisit it often to stay on track. For example, you want to save $12,000, and you’d like to take two years to do it, so you’ll need to save $500 each month. If you can reach your goal with your current income and expenses, great! However, you’ll likely need to find ways to save by reducing your costs.

• 3. Limit how often you dine out

  The average U.S. household spends $2,375 a year on dining and takeout. Don’t worry; you don’t need to stop eating out altogether to save. Instead, try these helpful tips. Replace half your dining out meals with home-cooked meals. Pick up your food instead of using third-party apps which add delivery fees and service charges to your bill. Cook enough for more than one meal at home, so you can skip the drive-throughs at lunchtime. And if you have an expensive coffee habit, brewing your java at home is an excellent way to cut your dining out bills.

• 4. Review subscription services

  Did you have a New Year’s resolution to work out more, but you haven’t been to the gym in months? Many of us have monthly subscriptions such as gym memberships or streaming services that we could probably live without. When building your budget, take time to scrutinize each of your subscription accounts to determine if there’s a less expensive option. Can you work out at home with a free workout app and basic gym equipment? Does your local public library allow you to borrow movies and TV shows? Can you cancel cable and pare down your streaming services from the average of four to your favorite one?

• 5. Cut energy consumption

  Save money and reduce the energy you consume with eco-friendly home improvements. One of the fastest ways to cut your energy bills and lower maintenance costs is replacing incandescent light bulbs with energy-efficient lighting. LEDs last longer, so you won’t need to replace them as often as traditional incandescent, fluorescent and halogen lighting.

• 6. Reduce your rent by living with roommates

  Let’s face it, reusing water bottles and swapping light bulbs won’t add up to an entire down payment, but reducing your rent just might. Millennials spend 45% of their income on rent between the ages of 22 and 30. With a record 64 million people in multigenerational family households, it’s no wonder sharing space is growing in popularity. Living under one roof means splitting bills which can result in significant savings. Having a roommate is another way to cut costs while boosting your savings for a down payment. Generally, sharing a two-bedroom apartment with a roommate is less expensive than the cost of living alone in a one-bedroom. According to SmartAsset, each roommate can save nearly $6,000 per year.

• 7. Improve your credit score

  While a good credit score doesn’t help you save for a down payment, it can help you qualify for an affordable loan with a lower down payment minimum. A higher score can also mean lower interest rates. Ways to improve your credit score include setting up autopay for your bills to ensure they’re paid on time, checking your credit report for accuracy and paying off debt.

The larger your down payment, the lower your loan-to-value ratio (LTV). LTV is the ratio of your loan amount to the appraised value of the home you’re buying. While there is no standard “good” loan-to-value ratio, a higher ratio can negatively influence your interest rate and need for private mortgage insurance (PMI) if you are looking at conventional financing.

Our affordability calculator estimates your required salary to purchase a home and can help determine how much you’ll need to save for a down payment. If you have questions about the best loan program and down payment option for your situation, connect with a loan officer for expert advice.