How to Begin Saving for Your Down Payment

Are you a first-time buyer? Are you looking to purchase a house, but not quite sure what steps to take first? We understand. Buying a home can be an intimidating process for some. But with a little bit of planning, you can be ready to purchase your own home when the time and market is right.

The first thing you’re going to want to do – most likely – is beginning to save up for a down payment on a home. Here are some pointers for getting that down payment set aside.

Determine How Much You Need to Save

While it may come as no surprise that you’re going to need a goal to get started, actually setting that goal isn’t an exact science. Conventional wisdom may lead you to read that lenders are going to be looking for 20% down on a home. That may be true in most cases, but there are options that allow you to put down a lot less on the cost of a home – as low as 3% or even nothing.

How could that be true? It’s driven by low-down-payment programs from the federal government. GSEs, or government-sponsored enterprises like Fannie Mae and Freddie Mac, for instance, back loans 97% to loan-to-value loans. Similarly, the Federal Housing Administration and the US Department of Agriculture offer to finance for down payments far below 20 percent. If you have served in the military, you may be eligible for 0% down paymen

t loans from the Veterans Administration.

Keep in mind that lending through these programs will mean that you will have larger payments down the line and that you may be required to pay mortgage insurance fees on the front end, instead. Just be aware of the options available to you and don’t despair if you find that 20% down landmark to be slightly out of reach.

Once you have a target percentage in mind, you will be able to determine what your dollar amount should be. Simply apply that percentage to the average price of homes in your desired neighborhood.

Create a Schedule

Once you have a target number in mind, you can set the pace for putting money aside towards your down payment. First determine whether you are going to be saving weekly, biweekly, or monthly. Then decide when you are going to be ready to buy – whether that’s in one year or 5 years. Once you’ve decided that, it’s simple division. Luckily, there’s a handy calculator for this right over here on NerdWallet.

Once you know what you need to set aside each month, the best way to keep to that schedule is to use automatic bank transfers. Most banks will allow you to make transfers that occur on a schedule that you determine, and you can stop or pause whenever you would like to. By having this occur automatically, it will remove any temptation that you might have to spend that money anywhere else.

Supplement Your Savings

Get your automatic transfers set up? That’s great – but it may feel as if progress is very slow for the first portion. That’s because you have set aside the bare minimum to reach your goal – it doesn’t mean that’s all you have to do.

Maybe you set aside your tax refund every year as an additional influx into your down payment savings. Maybe you skip taking a vacation one year and apply that portion of your budget there, or you may have access to a debit card that allows you to round up the change from purchases into a savings account. Maybe you put off buying a new car for a few months and use the savings on a car payment as an added bonus to your savings account. Try to keep your account in the forefront of your mind – if you constantly look for opportunities to contribute, that balance will keep moving up even faster than you might have realized.

Once you begin moving into a rhythm, you might also be able to get your savings’ interest to work for you, as well. Some banks – particularly online banks – have options for what is described as a “high-yield savings account.” Take advantage of financial institutions who do not have the burden of maintaining branches, and put them to work for you!

Once you’re certain you will have absolutely no need to draw from your down payment savings, you may also consider purchasing a certificate of deposit, also called a CD. A CD has a higher interest rate than most savings accounts or other financial products – but they will prevent you from taking any money out of them for a long stretch of time – from six months to several years. Just be sure you aren’t putting any other responsibilities at risk before buying!

The most important thing for you to do as you approach saving for a down payment is to start somewhere. Making a small amount of progress is going to do a lot more than all of the research in the world – so get saving, talk to a financial planner about your best goal to get there, and begin visualizing what your dream home is going to look like.