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Buying a new home is a big decision. After all, it’s a significant financial and emotional investment, so you’ll want to do it right. So, let’s start by sharing ways you could begin saving for your down payment. 

This guide will give you a new home checklist with practical tips for saving for your down payment.* It also includes information on special programs and grants that may help you as well.

Setting Your Down Payment Goal

Assess Your Financial Situation

Just like you would before purchasing a new car or planning a vacation, the first step is to assess your current financial situation. 

Understanding your income, ongoing expenses, and existing debts is crucial. This self-evaluation provides a foundation for setting a realistic down payment goal and timeline that aligns with your financial capabilities.

Understanding How Much Should You Save

Traditionally, a 20% down payment has been the gold standard, but more modern loan options require less. Conventional loans are available to people with credit scores as low as 620 and require just 5%. Some incentives exist for putting down a more significant down payment, like avoiding private mortgage insurance (PMI) with 20% or more.

The amount you will need to save and put down is determined by the price of the home, your income, and the mortgage terms. The Federal Housing Administration (FHA) has backed a mortgage option that requires as little as 3.5% down plus closing costs, but most terms will be higher. 

There are a number of helpful online mortgage affordability calculators that can help you estimate the range of homes you can afford and how much you will need to save based on your income, interest rates, existing debts, and other factors. When using a mortgage calculator to estimate your target down payment, experts suggest following a 28/36 rule. It is suggested that your target down payment should be limited by: 

  • Spend up to 28% of your gross income on housing expenses. 
  • Spend up to 36% of your gross income on debt.  

Calculate Your Target Down Payment

Calculating your target down payment is similar to estimating your mortgage but is determined using the home value, home location, and credit score. Use this online down payment calculator to get an idea of what you might be looking at for a minimum down payment. 

For example, the estimated minimum down payment for a home valued at $375,000 in South Jordan, Utah purchased by someone with a good credit score (700-719) would be $13,125. 

Strategies for Saving Your Down Payment

Budgeting for Success

Assessing your current financial situation should include estimating your monthly household spending. There are some unchangeable items like rent, utilities, and insurance–unless you can negotiate a lower rate through your provider–but there are also some flexible spending categories like food, clothing and entertainment.  

Temporarily freeze spending associated with “luxury” items and activities like leisure travel and fancy restaurants. It’s OK to budget for things like eating out and buying new things, but limiting the frequency to align with your budget will help you avoid overspending and extending the time to reach your down payment goals.   

Cutting Expenses

There is an art to expense reduction that doesn’t require sacrificing your lifestyle. Start by identifying opportunities for easy cuts that will have little impact on your day-to-day life. 

You would be surprised at how much you can save by cutting down on online publications and streaming services subscriptions. If you have a membership to an online retail program or fashion subscription service like ShoeDazzle, Birchbox, StitchFix, Dollar Shave Club, FabFitFun, etc., ask yourself if you can do without, at least temporarily. You may want to use a subscription management app to identify recurring transactions.  

Cutting expenses for first down payment on phone

Contact your insurance and utility providers to learn about options for reducing your monthly payments. If you have credit card debt, see if you can consolidate payments at a lower interest rate or look into refinancing programs if you have student loans. The power of a friendly voice and a compelling story can go a long way.

More significant steps may include renting a room in your house or even moving into a smaller home or apartment to reduce housing expenses. And there’s no shame in moving back in with your parents or a family member while you’re saving up to buy your own home. 

Increasing Your Income

Sometimes, the path to homeownership means increasing your income. The good news is that increasing your income is more accessible than it used to be. Sure, you can still try to nab a second job in your off hours at the grocery store or retail shop, but you can also work side gigs, submit for overtime, or sell unused items. 

We’re in the gig economy, given that anyone with a smartphone and Internet can easily make more money. If you have a vehicle, consider driving for Uber or Lyft or delivering food or groceries. There are even apps for sourcing catering and other freelance services like copywriting and design. If you have a hidden talent, turn your hobby into a cash cow by selling art, jewelry, or baked goods.  

Everyone has untapped potential for earning more income, and those dollars can add up quickly.  Don’t forget, homes are long-term investments with a value that may appreciate over time, so home = future income. 

High-Yield Savings Accounts and Investments 

Choosing where to store your down payment savings is very important. There may be significant benefits to using high-yield savings accounts and utilizing low-risk investments to balance growth, safety, and liquidity.

Most banks offer high-yield savings accounts. These types of accounts may offer higher interest rates than traditional savings accounts, your savings will appreciate faster over time. The FDIC reported the average percentage yield (APY) of traditional savings accounts between 0.07% and 0.45%, compared with high-yield savings accounts with APYs between 5-6%. 

Building a portfolio of low-risk investments can help you save for a down payment while giving you a safety net to manage market volatility. As the name suggests, low-risk investments earn lower returns than opportunities with higher risk. Because you’re not risking as much, these investments may be suitable for supporting short-term financial goals because they can pay off faster. Some low-risk investments to consider may include money market funds, corporate bonds, fixed annuities, dividend-paying stocks, and more. 

Programs and Resources for First-Time Homebuyers

Government Programs and Grants

There are over 2,000 down payment assistance programs in the United States, including federal and state programs designed to assist first-time homebuyers. The most well-known programs include FHA, USDA, and VA loans.  

The Federal Housing Administration offers FHA loans designed specifically for first-time homebuyers. The minimum down payment for an FHA loan is 3.5%. 

USDA loans are zero-down-payment mortgages for homebuyers purchasing in eligible towns and rural areas. The USDA Rural Development Guaranteed Housing Loan Program, part of the U.S. Department of Agriculture, guarantees these loans. USDA loans don’t require borrowers to pay PMI.  

VA loans are available to U.S. military veterans or active duty members. VA loans can be used to purchase a new home or refinance a home. These loans require little to no down payment with flexible loan terms. 

First-time homebuyers may also be able to withdraw up to $10,000 from their traditional Roth IRA without penalty for buying or building a new home. 

Local South Jordan Incentives 

The Utah Legislature recently announced a first-time homebuyer program offering up to $20,000 in assistance. The money is eligible for use towards a down payment, closing costs, and/or permanent interest rate buydown on a qualifying home loan. 

This program is administered by the Utah Housing Corporation and applies to new construction homes priced at $450,000 or less. Eligible participants must have lived in Utah for at least one year and can apply with a qualified lender at UtahHousingCorp.org

Common First-Time Homebuying Mistakes to Avoid

Overestimating What You Can Afford

One common mistake is overestimating the size or type of home you can afford. Throughout the homebuying process, it’s essential to be realistic about your long-term financial capabilities to ensure you don’t overcommit and put yourself and your family in a bad position down the road. 

Neglecting Other Savings Goals

When you’re saving for a down payment, that can feel like your only financial priority. A common mistake first-time homebuyers make is losing sight of other financial goals and responsibilities. 

The necessity of adding to your retirement savings and emergency fund doesn’t stop while you’re searching for a new home. Neglecting ongoing commitments like rent and utilities or paying student loan payments can have long-lasting adverse effects, like impacting your credit score and making the homebuying process harder and more expensive. 

Buy Your First Home with Daybreak

Your biggest takeaway: purchasing your first home is more attainable than you think.  With the right financial strategies and preparation, knowledge of assistance programs, and minor lifestyle changes, your dream home is just a budget away. 

home for sale for first time home buyer

Whether you’re looking for a single-family home or townhouse, Daybreak has a range of housing options for first-time homebuyers and families. Be sure to check if your preferred builder is offering any incentives here. Since opening our doors 20 years ago, we’ve guided 10,000 homebuyers to find “the one.” Are you ready to say yes? 

*Content contained in this blog post is provided as informational only. Please consult with a trusted expert for individual financial planning.

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