Homeownership is a dream for many people. However, saving for a house is a big task, especially when you have bills and rent to pay. Thankfully with some careful planning and commitment to the end goal, it’s possible to turn this dream into reality.
If you’re currently renting but dream of owning one day, check out these six tips on how to save for a down payment.
Open a separate savings account
As soon as you decide you want to become a homeowner, it’s time to start saving. Open up a separate savings account dedicated to your down payment. This is helpful for a couple of reasons: not only is it easier to track your savings and progress, but it also reduces the temptation to borrow from your down payment fund to cover other expenses.
You can open a savings account at your current bank or consider opening a high-yield savings account to take advantage of higher interest rates.
Your debt-to-income ratio (DTI) is something mortgage lenders look into when reviewing loan applications. The debt-to-income ratio is the percentage of the money you owe compared to how much you bring in. The less debt you have, the more confident lenders are of your ability to pay your mortgage.
Wondering where you stand with your DTI? You can calculate your DTI by dividing your monthly minimum debt payments by your monthly pre-tax income. While the lower your DTI is the better, you should try to aim for a DTI of 50% or less in order to qualify for most loans.
If you’re carrying a lot of debt, especially if it’s mostly credit card debt, you should concentrate on reducing it as much as possible. This will improve your DTI and your credit score, which will increase your chances of being approved for a loan.
Create a budget
Budgets get a bad rap but they’re very helpful. They give you control over your money, help you stay focused on your money goals, control impulse spending, and more. The 50-30-20 budget rule is a good place to start:
- Allow up to 50% towards essentials like food and housing
- Leave 30% toward discretionary spending
- Use remaining 20% towards savings and debt repayment
Laying out your expenses and spending will give you a clear idea of how you’re currently managing your money. You may be surprised by your potential to save more money than you thought! Let your budget guide your spending and saving habits.
Cut back on discretionary spending
Once you’ve created your budget, review your spending and see if there are any areas you can cut back on temporarily. Maybe you can cut back on cable or modify your cell phone plan to save each month. You don’t have to cut back on everything! You still need to enjoy life. Saving a few dollars here and there may seem insignificant but these small changes are worthwhile.
Once you’ve got a hold of your current spending, make saving easier by setting up an automatic transfer from your checking to your savings account. This also makes sure you don’t spend your savings on something else.
Save unexpected windfalls
Receiving an unexpected windfall, like a bonus, monetary gift, or even a tax refund, is always exciting. However, how many times have you already spent that money before it even hits your checking account? Instead of spending, funnel these bonuses towards your down payment fund.
Saving for a down payment is possible even while you’re renting as long as you commit to it. Following these tips will help make the transition from renter to homeowner easier. Once you’ve reached your savings goal and are ready to start looking for your new home, visit FCBHomes.com to learn more about our new home communities in Lodi and Riverbank.