Mortgage insurance typically cost around 1% of the total loan amount, every year.
This 20% of your mortgage is not a small amount and you may not have it saved already. If you have the money saved already, this article is not for you.
You try to save the amount or borrow it from someone else or borrow it from your own retirement fund.
The first step is to absolutely work the numbers and figure out your budget. While this is not an actual savings tactic, it’s a crucial step in the process because it gives you a concrete goal to work towards.
Knowing this number makes it a real goal and clears up the confusion and vagueness of having some idea of some large dollar amount, that’s probably unattainable anyway. Remember, half the battle is gaining mental clarity and setting the goal.
Remember, half the battle is gaining mental clarity and setting the goal.
Step 2 – Then use a home-buying calculator to plug in your numbers, and it will give you a better sense of how big of a home you can afford.
Zillow’s mortgage calculator is pretty helpful in helping you find this number.
Step 3 – To know how your potential creditors think you’re capable of handling, get pre-qualified. Do not look for a $500,000 home if you are pre-qualified for only $300,000. This is a reality-check step.
For simplicity’s sake, let’s say we did our budgeting and used the calculator to figure out that you can afford and qualified for a $500,000 home, so your down payment savings goal should be $100,000.
Now consider these tips to save up.
Now you can start to plan how much money you should really put aside each month.
You’ll also get a better idea of how long it will take to reach your goal. If you’re on the five-year plan, that means you’ll need to save an extra $20,000 a year.
Don’t panic, just break it down further. An extra $20,000 a year is about $1,700 a month, which sounds way less intimidating.
Keep in mind you’ll still need to continue saving for your emergency fund, IRA, and paying down debt.
You’ve heard this from me again and again: get a side gig, make extra money, work overtime, increase your income!
It sounds like generic advice but there’s a reason why experts dish out the same advice: it’s because earning extra money is a lot easier than drastically changing your lifestyle to scrimp and save.
Going this route is just not realistic or sustainable. Pinching pennies is not going to get you closer to the $1,700 each month, but increasing your income will.
This is going to take research on your part, but it’ll be worth it — just imagine how you will enjoy your dream house, and what the extra income will afford you.
The best way to start is to make a list of what you’re good at, and if you can leverage and outsource those skills during your free time to make that $1,700.
One of the items that your mortgage lender will look at is your overall DTI (debt-to-income) ratio.
If you’re carrying a lot of credit card debt, you might want to look into a personal loan to consolidate and lower your payment. Debt consolidation loans can help you have a single monthly payment at a fixed rate.
Not only does this help you eliminate debt faster, but it can help increase your credit score by up to 40 points according to Payoff.
If you’re able to reduce your monthly payment and increase your score, you’ll be in great shape to qualify for a mortgage.
After you establish that, any kind of extra money that comes in during the year goes straight into that fund.
This includes any bonus from your employer, tax refunds, Christmas bonuses, gifts, inheritances, lottery, gambling win, etc.
A 20 percent savings goal may be discouraging, especially if you have zero saved, but it can be done — all you need is a concrete plan and a savings mentality.
These methods are tried by people I know.
Try to find alternative areas where housing is cheaper and your present savings allow for you to buy a home there, instead of the dream location you previously thought about.
If you have valuable property elsewhere then sell it to arrange for mortgage down payment. This includes inherited valuables, foreign real estate, etc.
Putoff savings in your retirement fund for a couple of years. Redirect this fund to your home buying fund.
If all else fails, then go for mortgage insurance by paying only a small % of the loan, typically 5% only. But, be prepared to spend extra $100-$300 per month on mortgage insurance. You can start repaying the loan faster and as soon as cross the 20% ownership criteria, opt out of that insurance.
Start with determining how much down payment is required for your need, your credit and home location. Then divide the number by the months you’re willing to wait. Once you have the monthly savings goal, start by aggressively saving that amount from your monthly budget or increase side income.
You can also bring in additional money from selling some of your valuable stuff to reach your goal early. You can also consider lowering your goal by opting for a smaller home, different location. If you fail in your goal, down pay a lesser amount and opt for mortgage insurance.
Readers, let us know how you saved for mortgage down payment.