For most people, the highest hurdle in their journey toward home ownership is the down payment. And saving for a down payment often seems nearly impossible when the time frame is short, say, within a few months. But you can save for a down payment if you have a plan and take the right steps – and it doesn’t have to take years of scrimping and saving. Here are 5 tips to help you save for a down payment in Alameda County in just 6 months.
1. Determine How Much House You Can Afford and the Size of the Down Payment
Your first step to save for a down payment in Alameda County (in 6 months or any other time frame) is to figure out just how much that down payment will be. Begin this process by determining how much how you can afford, and then you’ll have a good idea of the size of the down payment you’ll need to save for.
Here’s what industry experts advise to help you do this . . .
“Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for. Generally speaking, your housing expense should not exceed 28% of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment. The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any.”
But you also have to factor in the down payment in determining what you can afford. Formerly, 20% of the purchase price was the norm for a down payment, but then for many years, it was less. Now, though, more and more lenders are requiring 20% again or something very near that.
Following this calculations process will give you a good idea of what you can afford and how much down payment you’ll have to save – thus giving you a good starting point. Remember, too, that your Alameda County agent can provide some valuable assistance here. Just call (408) 893-1866 to find out more.
2. Set Up and Implement a Strict Budget
The next best step to save for a down payment involves setting up and implementing a strict budget – and sticking to it. You need to control expenses each month in order to set aside money for a down payment.
“No one wants to hear it, but having a budget (and actually sticking to it) is the key to quickly saving money for a house. This can’t be your ordinary easy to accomplish budget either. If you are saving for a house, you have to have a laser-like focus on your spending habits. Your spending budget should be bare bones. Every little bit of extra money needs to be going towards your [down payment] fund. To accomplish this step you have to really have a firm vision of your future home.”
Some effective budgeting systems include:
- Percentage-based budget
- Envelope system
Just find the system that works best for you, and go at it full bore. You’ll be amazed at how much you can save within a few months.
3. Evaluate Your Assets
Strictly speaking, this isn’t a way to save for a down payment in Alameda County. It is, though, a good way to increase the amount of money you have for a down payment in a short time. And that is to evaluate your assets and see what you already have that can be added to your down payment money, especially if you want/need to pay 20% down.
You could, for example, liquidate any stocks or savings bonds you may have. You could also “take a loan from your retirement fund. The IRS allows you to take out a loan of up to $50,000 or 50% of your vested retirement savings, whichever is less. You then make quarterly payments back into the plan over the course of a certain term until the loan is paid off.”
But do be careful if you choose to tap into your retirement account. “If you don’t make your quarterly payment, the rest of the outstanding balance can be considered a distribution, and you would pay a 10% early withdrawal tax penalty. Additionally, if you leave a company, they have the right to immediately call the loan balance due if they want.”
4. Cut Costs . . . Ruthlessly
Similar to budgeting (but slightly different), cutting costs – ruthlessly – is another good way to save for a down payment. We all spend more than we really need to, so it’s not all that difficult to cut costs. It may be a little uncomfortable and require some sacrifices, but, remember, it will be only for a short time. And the payoff will be worth it.
“The biggest thing you have to do to save a down payment in 6 months is learning to say no. It sucks, but you need a scorched earth policy. Every single extra penny you have needs to go into your saving money for a house fund for the next six months. Literally no exceptions. Be open and honest with your family and friends and set the expectation that you’re going to be a cheapskate for the next 6 months while you save for your down payment.”
It’s even possible to make cutting spending fun by making it a challenge. And, besides, there are a lot of free alternatives out there, especially in the area of entertainment.
5. Use an Automated Savings Plan
If you, like most of us, aren’t a disciplined saver, then you should automate your savings. Set up an automated savings plan so that your down payment money goes into a dedicated savings account before you ever get your hands on it.
To save for a down payment, then, set up “some sort of payroll savings plan. Just like your 401(k) plan, you should allocate a certain percentage or dollar amount of your regular pay to go directly into a savings account or money market account dedicated to accumulating the funds for your down payment. Not only does this make the process automatic, but it also makes it invisible.”
Using an automated savings plan eliminates both the temptation and your ability to spend your down payment money before it goes into savings.
And Rely on Your Alameda County Agent
Wouldn’t it also be great if you could get a better deal on your dream home so that you don’t have to pay as much down? That’s where your Alameda County real estate agent can help. If you want to do more than just save for a down payment in Alameda County, then contact us today at (408) 893-1866 .