Planning to buy your first home? If you’re a first-time buyer, you will no doubt know how difficult it can be to save for a home. In fact, putting a large enough home together can, for some people, be a significant barrier to homeownership.
According to ATTOM Data Solutions, U.S. housing affordability in the last quarter of 2018 fell to its lowest level in 10 years. As home prices rise, the down payment required for the purchase also increases.
But rising home prices aren’t the only problem. Compounding the challenge facing first-time buyers is the fact that many are struggling to pay off student loans and rent.
According to Freddie Mac Multifamily, two-thirds of renters (66 percent) reported difficulties paying their rent at some point during the past two years. As high rents and student loan payments squeeze potential homebuyers, making it harder to save money for a home.
“Many people now live beyond their means, so they haven’t taken the time to evaluate their finances to see where they could cut spending or make more money to save,” says Jocelyn Wright, an adjunct professor at the American College of Financial Services in Bryn Mawr, Pa.
A new Zillow analysis found that for someone earning the median income and saving 10 percent each month, it would take more than seven years to save 20 percent of the home in a typical U.S. home. And if you expect to buy in a more expensive market, such as New York or Los Angeles, it would take even longer: 11.4 to 18.4 years, respectively.
But there is good news. With a little advance planning, some creative ways to increase income, and a little belt-tightening, you’ll be well on your way to your first home much faster. This is especially true if you look at low-down mortgages, some of which require as little as a 3 percent reduction. There are also Federal Housing Administration programs that allow down payments of just 3.5 percent. The lower the down payment, the less cash you’ll have to save.
Common Sources of Home Payment
There is a common source of funds for many first-time households: the mom-and-pop bank. According to Zillow, 30 percent of shoppers get help from family or friends in the form of gifts. Other sources include:
- Leveraging your savings
- Sale of shares or other investments
- Using retirement funds (although many financial planners disapprove of this)
Creating New Sources of Income
Providing extra money can help you build a home faster.
Consider the following:
Force yourself to save. Matt Hackett, operations manager at direct mortgage lender Equity Now, saved for a home by creating a plan. First, you opened a separate savings account just for your down payment. Then, he set up a second direct home, diverting the amount of money he wanted to save from each paycheck based on his projected prepayment needs and the term to buy a home. “Having a savings plan is crucial,” Hackett says. “It helped me to have the funds in a separate institution so I wouldn’t check the balance on a daily or weekly basis as I handled my day-to-day financial transactions.”
Get a part-time job and put that money in a separate account.
Turn your passion into profit. If you have a hobby, such as knitting or doing beads, don’t give away your products; Sell them in a local marketplace or online.
Consider selling collectibles or household items you no longer use. Have a garage sale.
If you have extra space in your current home, find a roommate. If you live in a place that’s popular with vacationers, sign up for Airbnb.
Instead of giving gifts to your spouse, deposit the value of those gifts into your down payment fund.
Don’t spend your tax refund. Instead, deposit your cashback and other unexpected income, such as rebates or bonuses, into your down payment fund.
Review your employee benefits. Wright, of the American College, says some employers will give him money to buy a home.
If you get an annual raise, deposit the raise and continue living on your old salary.
Cancel streaming services, such as Netflix, and eliminate non-essential luxuries, such as manicures and massages. You can also save about $4 per day by brewing coffee at home or in the office and going without that great spiced latte.
Review your credit report and correct errors. By improving your credit score, you may be able to lower the interest rate on your credit cards.
Consider refinancing your student loans to lower your monthly payments. You should be careful not to consolidate private loans with other loans, Wright says, but by refinancing you can significantly reduce your payment.
The bottom line: You can save for a down payment and achieve your dream of owning a home. “Do the math,” says Robert Karn, a certified financial planner in Farmington, Connecticut. “Reaching a financial goal is tangible if you stay focused and disciplined.”