Saving for a Down Payment is no easy task. If you’re just starting your home search or even just starting to think about buying a property, chances are, you already have a picture in mind of what you’re looking for. You may be wondering how much do you need to have for a down payment on a home? This is a question asked by many of my buyers and even some renters who are weighing their options before signing a lease on a rental. The truth is, it varies. No two houses or financial situations are the same and therefore, the amount you need to put down is not a one-size-fits-all amount. Not to mention, your down payment is usually a sizable chunk of change! So, how do you go about saving such a large sum of money? As always, your NJ Real Estate Geek is here to help you learn How to Save for a Down Payment on a Home! 

Why Consider Buying? 

Depending on your current living situation, this may be a no-brainer for you. However, for some, it might take a little thought. Buying a home is a big decision and one that should not be made lightly. There are many things to consider when deciding if buying a home is right for you at this current juncture of your life. 

Whether you’re ready to buy now or are considering buying soon, here are some things to consider when making your decision. 

Cost of Rent

If you lease your current home, you would probably agree that your rent is the largest bill you pay each month. Depending on where you live and where that neighborhood is in the “real estate market cycle”, the cost of rent is likely to change over the years. In most places in the US, the cost of rent has been steadily increasing since the market crash in 2008. 

With that being said, that lump sum of change that comes out of your pocket each month for rent is likely to get more difficult to make or, makes it more difficult to save. 

Higher Cost of Living Means it’s Harder to Save 

Inflation in the US is alive and well. That means as the value of a dollar decreases and the cost of living increases, it is getting more and more challenging for families to save money. Therefore, the sooner you have control over what you own, the more stable your finances will be. Owning a home may be the solution in this case. 

Mortgage Rates Are at an All-time Low 

The COVID-19 Pandemic has brought along a lot of unpredictable situations for everyone. One of the biggest changes has been the impact on the Real Estate Market- i.e. mortgage rates. With mortgage rates being at an all-time low, the housing market has been taking off. Even with the low inventory and competitive bidding situations on homes, buyers have been making out with lower interest rates and monthly payments on their mortgages than ever before. 

If you’re thinking about buying in a year or less, this is not something that you should take lightly. Getting a low mortgage rate can set you up with much financial success as a new homeowner. So, take advantage of this market!

Where to Start Before You Save for a Down Payment 

Now that you’ve thought about why it may be beneficial for you to buy a home, there are some things to get in order before you decide how much you need to save for a down payment. If you have a real estate agent, give them a call! Good agents are professionals who specialize in helping people navigate all aspects of the real estate market. They’ll help you sort through the many facets of preparing to buy a home. Here are some things to think about before you start saving for a down payment. 

Do Your Research

Let’s start by doing some research and asking some questions. 

Where Do You Want to Buy?

Most people have a general idea of where they see themselves living even before they formally start their home search. Maybe it’s close to work, friends, or family? Maybe it’s where you’re currently living? Wherever you see yourself living, start by hopping on Realtor.com and seeing what home prices are like in those areas. 

Why realtor.com and not zillow.com? Because Realtor.com is run by the National Association of Realtors making it much more accurate when searching for homes. 

How Much Would You Like to Spend? 

Even before you formally find out how much you can spend, think about how much you want to spend. Based on the area you’re looking in, what kind of home you’re purchasing, and your income, decide how much you would ideally like to spend on a home. 

There are many free Mortgage and Affordability Calculators online like this one from Bank of America: Affordability Calculator. This tool can be used to loosely calculate how much you can afford to spend each month for a mortgage while taking into account your income and expenses. 

Another great tool is this Mortgage Calculator from NerdWallet: Mortgage Calculator. You enter how much you think you’d like to spend and this calculator will give you an idea of your monthly mortgage payment, possible taxes, insurance costs, and down payments. Since mortgage rates vary based on location, this tool gives you the option to change your location as well as look at different types of loans.

NOTE: These tools are guides and are NOT guaranteed for accuracy and do not replace a Pre-qualification or Pre-approval. This Mortgage calculator does NOT take into account your income or credit history which are two very important factors when qualifying for a mortgage. More on that below! 

What’s Your Timeframe? 

When do you want to buy? Do you want to buy within 6 months, a year, or 5 years? Depending on when you can realistically buy will determine how much you’ll need to save each month for your down payment. If you’re currently renting, this may mean needing to sign another year’s lease so you have time to build your savings. If you have high-interest debt (such as credit cards or other loans) you’ll want to pay those off before you save for a down payment. 

No matter what your timeframe, check out these “10 Tips for Starting Your Home Search” to make sure you’re hitting the ground running from the beginning! 

Check Your Credit Before You Save for a Down Payment

Your credit is probably the most important factor when it comes to your mortgage interest rate. The better your credit, the better interest rates you’ll qualify for. Before you get ready to meet with a mortgage lender, check your credit! If there’s anything unusual on your credit, dispute it early! Even if your credit is not what you would like, it’s better to know early so you have time to strengthen it! More on this below!

Meet with a Few Mortgage Lenders 

If you have any questions about mortgages, meet with a lender. If you have a real estate agent, ask who they would recommend. Most agents have a few preferred mortgage lenders that they recommend to their clients. These are the best of the best in their professional circle and are usually the best place to start. 

Decide on a Loan Type

Talk to your Mortgage Lender about the different types of loans that you might qualify for. Some loans offer different options when it comes to down payments. Educating yourself on the different types of loans available to you will help you make an informed decision on getting a mortgage. 

Get Preapproved or Prequalified for a Mortgage (Yes, there’s a Difference!)

Once you decide on your lender and loan type, talk to your lender about being preapproved or prequalified. And yes, there is a difference! 

A Preapproval is a formal letter stating how much money you have been approved for your home. When getting a Preapproval, your mortgage lender performs a hard check on your credit (this means your credit is run and slightly impacted). You are required to submit a Preapproval letter on any home you place an offer on which is why they’re so important when starting off your home search!  A Preapproval Letter lasts a term of usually around 6 months and then it expires. If you’re planning on buying within 6 months, try to get your pre-approval before you start looking for a home! 

If you’re not planning on starting your home search for a year or more, you should choose to get a Prequalification from a lender. A Prequalification is not a Preapproval. There is no hard credit check for a Prequalification. A Prequalification is an estimate of how much you may be approved for based on information you provide your lender on your finances. This is the best option for buyers looking to buy soon but want to explore different loan options in more depth. 

Check out the differences between Preapprovals & Prequalifications here: “Prequalified VS Preapproved: What’s the Difference?”  

Decide How Much You’d Like to Put Down

Once you’ve explored your options and before you start to save, it’s time to decide how much you would like to put down. Ideally, you should try to have 20% of the total home amount as a down payment. This can help you avoid PMI and also gives you equity in your new home from the very beginning of the process. 

But that is no easy task. For example, the average home price in the state of New Jersey is $360,000. To have a 20% down payment, you would need to save $72,000. And that’s just for your down payment. There are other expenses when closing on your home in addition to your down payment such as attorney fees, closing costs, and moving expenses. 

HINT: To find the down payment for a home, follow the formula below! 

Total Home Price x Percent Down (as a Decimal) = Down Payment Amount

EX: $360,000 x .20 = $72,000

However, just because 20% is ideal for a down payment, doesn’t mean it’s the only option and not being able to put down 20% should not keep you from owning a home. Many people, especially first time home buyers, choose to put down less than 20%.  Some loans, like those dedicated to First-time Home Buyers or FHA loans, will allow you to put down as little as 3% on the purchase of your first home. 

Regardless of what you’re comfortable with as a downpayment, remember- that money doesn’t go anywhere. It counts towards your homeownership and when you decide to sell, you will get it back! 

Talk with your mortgage lender about the down payment options that would be best for you! 

Make a Savings Plan 

You know how much you’re likely going to spend on a home. You know how much of a down payment you will need and you know your time frame. So what do you do next? Make a savings plan! 

Start by determining how much you will need to save per month! Let’s revisit the average home price in the state of New Jersey- $360,000. With 20% down, we will need a down payment of $72,000 and we’d like to be able to buy within 2 years. 

To figure out how much you’ll need to put into savings per month, follow the formula below: 

Down Payment Amount / Time Frame (in months) = Amount to Save Each Month 

Ex: $72,000 / 24 Months = $3,000 per Month

If $3,000 per month into savings seems like a lot to you, you’re not alone! So where do we go from here? Well, you have some options- 

#1: Change your Percent Down

Let’s say your time frame is concrete. You need to buy a home in 2 years. But putting $3,000 into savings per month is an unreachable goal for you. Change the percent that you want to put down! 

On a $360,000 home… 

• • 20% down is $72,000 
  • 15% down is $54,000
  • 10% down is $36,000 
  • 5% down is $18,000 

Instead of 20% down, let’s do 10% down. 

$36,000 / 24 Months = $1,500 per Month

Putting $1,500 in savings each month is definitely more attainable! 

#2: Change your Time Frame 

If you’re set on putting 20% down on your home but $3,000 a month seems too steep for your budget, see if you can stretch your time frame! By giving yourself more time to save, you decrease the amount you need to put into savings each month. 

On a $360,000 home… 

• • 2 years (24 months) is $3,000 per month.
  • 3 years (36 months) is $2,000 per month.
  • 4 years (48 months) is $1,500 per month. 
  • 5 years (60 months) is $1,200 per month. 

If you double your time frame from 2 to 4 years, that brings your monthly savings contribution from $3,000 to $1,500. Much more attainable! 

#3: Change Your Home Price

If you’re set on your time frame and you know you want to put 20% down but $3,000 doesn’t seem realistic for you, consider changing your home price and going for a less expensive home! 

Let’s say we lower our budget from $360,000 to $275,000 your down payment would be $55,000. Your monthly savings contribution would be $2,300 for 2 years.

If you were to use a combination of these factors, your monthly savings contribution could be even lower! Let’s say we lower our home price to $325,000. Instead of 20% down, we’ll put down 10%. We’ll extend our time frame from 2 years to 3 years. 

First, let’s find out how much we have to put down:

Total Home Price x Percent Down (as a Decimal) = Down Payment Amount

$325,000 x .10 = $32,500

Next, let’s see how much we would need to save per month:

Down Payment Amount / Time Frame (in months) = Amount to Save Each Month 

$32,500 / 36 Months = $903 per Month

It’s that simple! With small compromises and adjustments, you can make this large sum of money much more attainable and make your home-owning dreams a reality! 

#4: Free Up Your Budget 

Buying a home can help you be financially and emotionally free; however, if you’re not prepared for the expense, you can set yourself up for trouble down the line. When preparing to save for a down payment, every little bit of extra cash that isn’t budgeted for should be going toward that home fund! The more you can free up your budget the faster you can put money into savings. 

One of the best ways to boost your monthly savings contribution is by freeing up your monthly budget!  Already got a budget? Great! Make sure it’s up to date and try to account for every expense you can (including contributing to your emergency fund). Don’t have a monthly budget? Check out this post on “How to Make a Monthly Budget That Works”. 

Cut Costs Where You Can

Looking at your budget, see if there are some things that you can cut back on or even do without during the time that you’re saving. The sacrifices you make while you save for a down payment will help you reach your goal faster! Here are some quick “cost-cutting” ideas to think about when looking at your budget:

• • Stop eating out ($50 a week or $200 a month) 
  • Have a designated “No-Spend Weekend” once or twice a month ($100 a month)
  • Plan your meals before you go grocery shopping (you wouldn’t believe how much this can help with overspending!) (around $50 a week or $200 a month)
  • Cut the Gym for a bit ($30 a month) 
  • Take a year without a vacation (at least $3000 a year) 
  • Cut those bi-weekly trips to the nail salon ($80 a month) 

Just by cutting the expenses listed above, you stand to save a minimum of about $600 a month! That’s $600 that can be going towards your down payment! 

Check out these “8 Strategies to Help You Save for a Down Payment Fast” for more tricks of the trade when saving for a down payment! 

Other Things to Consider When You Save for a Down Payment 

Build Your Credit

While you save for a down payment, keep an eye on your credit. Just as with any loan, your credit score will determine if you qualify for a mortgage, It also plays an integral part in the interest rate that lenders will offer you. 

If you’re not happy with the rates you’ve gotten when you get your pre-qualification from your lender, use the time that you’re saving up to build and strengthen your credit. There are a lot of ways you can strengthen your credit over time. Check out these “Credit Building Hacks from the Pros” to start implementing some strategies to give your credit score a boost. 

Have a Separate Savings Account 

Having your Down Payment funds in a separate savings account can help you in a few ways. 

• • It makes the funds less accessible than your day to day funds (which means they’re less of a temptation!)
  • It’s easier to track your saving progress 
  • It allows you to save for more than one thing at a time (i.e. emergency fund & a down payment!)

Remember Your Other Closing Expenses

Your down payment is not the only cash expense that you should save for when buying a home. Here are some other expenses to keep in mind when saving for your down payment: 

• • Closing Costs: Closing costs are the fees and expenses you pay to finalize your mortgage. Most can vary but as of 2017 in the state of New Jersey, closing costs ranged from 2% to 3% of the total loan amount on the home. [What to know more about Closing Costs? Check out our detailed post here: Closing Costs De-Mystified”.’]

• • Moving Expenses: After you close on your home, you’ll want to have some extra cash on hand to cover the expense of moving in! This expense will vary depending on what type of moving option you choose. If you’re planning on hiring a moving company, most will give you an estimate of what their services will cost you! 

The Takeaway 

Saving for a down payment isn’t always easy but there are ways you can do it while keeping your finances healthy and without stretching yourself too thin. Doing your due diligence, working with the right professionals, and making the right financial moves can make saving for a down payment and owning a home possible for anyone. 

Thinking about buying a home? Contact Me or reach out via Email! 

Questions? Comments? Concerns? Share them below! I’d love to hear from you.