In 2016, I purchased my first home: A 1930s brick Tudor with a round, purple front door and a big, if neglected, backyard. The significant other and I have spent the last two years fixing it up (and converting the basement into an income property!) to make it ours.
People are often surprised to hear I’m a homeowner — I’m in my mid-twenties — and I’ll be the first to say I had a lot of lucky stars align to make it possible so early (a dual income and relatively-affordable home prices in Salt Lake City, Utah, for starters). But I’d been putting money away for “the future” since I was 18, which made a downpayment seem within reach once we started considering homeownership.
When thinking about how to save for a down payment, imagining a lump sum of money large enough to buy property might sound like a thing of myth and legend. But with a healthy dose of determination (not to mention patience), it’s not impossible to get there. And no, you don’t need to give up every simple pleasure in life — you can have your avocado toast and eat it, too.
How to save for a down payment on a house
Attack credit card debt ASAP
We’ve all been there. The general costs of adulthood, plus a splurge or two, can easily result in thousands of dollars racked up on credit cards. If you have debt racking up interest, there’s absolutely no point in putting savings away for any reason: Doing so is counter-productive and can give you a false sense of how much money you actually have.
Be aggressive about paying down your credit card debt if you envision home ownership in your near or distant future. Have your card be the first bill you pay after your paychecks come in (and better yet, set up automatic payments so you know you’ll be completely debt-free within a few months.
Figure out your down payment savings goal, then make a plan
You might not actually need to save as much as you think. Banks typically want a 20 percent down payment on a conventional home loan, but many lenders will accept far less with the purchase of mortgage insurance, and there are other loans available that require even smaller down payments. FHA Loans will accept a 3.5 percent down payment, for example, but buyers will want to consider the pros and cons of using one. If you’re a Veteran, you can use a VA loan to purchase a home with 0 percent down and lower interest rates than conventional loans. Anyone looking to tackle a fixer-upper (which is what we did, though after 2+ years of renovating I’m not sure I recommend it anymore) might consider a HUD 203(k) loan, which allows homebuyers to borrow money for the improvements, as well.
It’s also helpful to check if your state has a first-time homebuyer program offering smaller down payments and lower rates to young, hopeful homeowners.
When figuring out how much you’ll need to save, consider the following: What size type of property will you want, and how much are those selling for in your area? Considering what loan you’ll apply for, what percentage will you need for your down payment?
I live in Salt Lake City, where 3-bedroom homes are now selling for about $300,000. If someone were to use an FHA loan to buy a home with a 3.5 percent down payment, they’ll need to save $10,500 — a much less intimidating number than the traditional $60,000.
Do better than your regular savings account
With APY on regular savings accounts being basically non-existent these days, transfer your “future home” money to an account that collects much higher interest. I use Ally (this isn’t sponsored… it’s just what I use) because their online savings account has a 1.35% APY, compared to the pitiful 0.01% I was getting at my traditional bank.
If you’re feeling ready to commit to your savings plans, you might consider putting money into the more-dramatic Certificate of Deposit account. You won’t be able to access your money for a set amount of time without paying a fee, but you’ll be racking up daily-compounded APY up to 2.5%.
Save your raises, bonuses, and tax returns
It is SO EASY to fall victim to lifestyle inflation every time you get a raise or better-paying job. But instead of upgrading your car or apartment, ask yourself if you can keep living a simpler lifestyle for a few more years so that money can go straight to savings instead. Every time you get an income increase, increase the amount of money you’re automatically transferring into savings each month. If you maintain your lifestyle, you’ll gradually save more and more without feeling the burden of penny-pinching.
Similarly, I know it’s tempting to spend your tax return or yearly bonus on things you’ve been eyeing, but putting them straight toward your savings account will fuel your momentum and put your goal within sight.
Break down your savings goal into a daily amount.
Say you need to save $30,000 for your first home. If you want to buy said home five years from now, you’ll need to save $6,000 a year, or about $16.50 a day. If you can get away with a smaller down payment, that number becomes even more doable. Knowing the daily amount I wanted to save helped me make smarter decisions about when or when not to order takeout, buy that $6 latte, or pop into H&M for a little shopping.
Small and slow is totally OK
Even if home ownership seems COMPLETELY out of reach, you can still get the ball rolling, if slowly, toward a future savings goal. Putting aside any money at all, be it $50 or $100 or $200 or more, into a designated savings account helps set your intention and put you on the path toward savings more.
When you do buy a home, consider an owner-occupy property
When we were looking at homes, we knew we couldn’t afford the modern, updated, gorgeous home of our dreams. We also knew we couldn’t save for a downpayment AND the tens of thousands of dollars we’d need for renovations.
Enter, the income property. We found a home with a walk-out basement that could be easily turned into a second unit. The rental income pays our mortgage, which allows us to put the money we save toward home improvements. Fingers crossed we’ll be able to gut our 1950s, yellow-tiled bathroom this year.