Planning to purchase your first home? If you’re a first-time buyer, you no doubt know how challenging it can be to save up for a down payment. In fact, putting together a sizeable-enough down payment can, for some people, be a significant barrier to homeownership.
According to ATTOM Data Solutions, U.S. home affordability in the third quarter of 2018 dropped to its lowest level in 10 years. As housing prices rise, the down payment required to purchase also goes up.
But rising home prices aren’t the only problem. Compounding the challenge first-time buyers face is the fact that many are struggling to pay student loans and rent. According to Freddie Mac Multifamily, two-thirds of renters (66 percent) reported difficulty affording their rent at some point over the past two years. As high rents and student-loan payments squeeze prospective homebuyers, it becomes more difficult to put away money for a down payment.
“Many people now are living above their means, so they haven’t taken the time to evaluate their finances to see where they might be able to cut expenses or earn more money to put aside,” says Jocelyn Wright, an adjunct professor at the American College of Financial Services in Bryn Mawr, Pa.
A new Zillow analysis found that for someone making the median income and putting away 10 percent each month, it would take over seven years to save for a 20 percent down payment on a typical U.S. home. And if you’re hoping to buy in a more expensive market, such as New York or Los Angeles, it would take even longer—11.4 and 18.4 years, respectively.
But there’s good news. With some advance planning, a few creative ways to increase income and a little belt tightening, you can be well on your way to your first home much faster. That’s especially true if you look into low down payment mortgages, some of which require as little as 3 percent down. There are Federal Housing Administration programs as well that allow for down payments of just 3.5 percent. The lower the down payment, the less cash you have to stash away.
Common Sources of Down Payment Funds
There’s one common source of down payment funds for many first-timers: the bank of mom and dad. According to Zillow, 30 percent of buyers receive help from relatives or friends in the form of gifts. Others sources include:
- Tapping your savings.
- Selling stocks or other investments.
- Using retirement funds (although many financial planners will frown on this).
Creating New Income Streams
Bringing in additional money can help you put together a down payment faster. Consider the following:
- Force yourself to save. Matt Hackett, operations manager of direct mortgage lender Equity Now, saved for a down payment by creating a plan. First, he opened a separate savings account just for his down payment. Then, he set up a second direct deposit, diverting the amount of money he wanted to save from each paycheck based on his projected down payment needs and timeline for purchasing a home. “Having a savings plan is crucial,” Hackett says. “It helped me to have the funds in a separate institution so that I would not look at the balance on a daily or weekly basis as I handled my day-to-day financial transactions.
- Get a part-time job and put that money into a separate account.
- Turn your passion into profit. If you have a hobby, such as knitting or beading, don’t give your products away; sell them at a local flea market or online.
- Consider selling collectibles or household goods you no longer use. Have a garage sale.
- If you have extra space in your current home, find a roommate. If you live in a spot that's popular with vacationers, sign up for Airbnb.
- Instead of giving gifts to your spouse, deposit the value of those gifts into your down payment fund.
- Don't spend your tax refund. Instead, deposit your refund and other unexpected income, such as rebates or bonuses, into your down payment fund.
- Check your employee benefits. Wright, of the American College, says that some employers will give you money toward purchasing a home.
- If you get an annual raise, bank the raise and continue living on your old salary.
You can make an effort to reduce your expenses and set aside the savings. Here are some ways to cut costs:
- Entertain at home. Stop going to the movies, restaurants and concerts — or cut back — and deposit the money saved in your down payment account. “If you normally go out once a week and spend $50 each time, go every other week and deposit $100 into the fund each month — or $1,200 a year,” says Mike Sullivan, a personal finance consultant at Take Charge America, a credit counseling and debt management agency. Even if you just skip the drink with dinner and save $10 every other week, you’ll be adding $260 to your account over a year.
- Cancel your gym membership and try running or exercising at home instead. Cancel streaming services such as Netflix and cut out non-essential luxuries such as manicures and massages. You can also save about $4 a day by brewing coffee at home or in the office and going without that grande pumpkin spice latte.
- Review your credit report and correct errors. By improving your credit score, you may be able to reduce the interest rate on your credit cards.
- Consider refinancing your student loans to bring down your monthly payments. You have to be careful not to consolidate private loans with other loans, Wright says, but by refinancing you may be able to bring down your payment significantly.
The bottom line: You can save for a down payment and achieve your dream of owning a home. “Do the math,” says Robert Karn, a certified financial planner in Farmington, Conn. “Achieving a financial goal is tangible if you stay focused and disciplined.”