Preparing for Homeownership: How to Save for a Down Payment Faster
April 30, 2020
The first steps to take toward homeownership are paying down debt, determining how much money you need, and saving for a down payment. Working toward these goals will help you prepare for purchasing your first home.
Pay down debt
Mortgage lenders look at your debt-to-income ratio (among other things) when determining how much you can afford. By paying down debt, you’ll lower your debt-to-income ratio, making you a better candidate for homeownership.
When starting to pay down debt, try the snowball method. To use this method, figure out the loan with the highest interest rate and make extra payments toward it as often as you can, while still making the minimum payments on your other loans. Once you pay off the first loan, move on to the next highest interest rate loan until you’ve paid off all of your loans. Doing this will also save you money in the long run by reducing the amount of interest you are paying over the life of the loans.
Determine how much you need to save for a down payment
Once your debt is under control, you can start saving toward your down payment. Generally, lenders allow as little as 3% for a down payment on your mortgage. For a $150,000 house, that means saving at least $4,500. At OU Credit Union, we offer a First-Time Homebuyer Program to help new homeowners better understand the process of buying a home.
Create a savings plan
Start by creating a budget – begin with your monthly income then subtract your monthly expenses, and you’ll know how much you can save toward a down payment each month. Don’t forget to include more than just your bills. Look through transactions to see how much you spend on expenses like restaurants, car repairs, gas, entertainment, and shopping. When evaluating all of your expenses, you may find ways to save by cutting down on unnecessary spending.
Determining when you can start looking for your new home will depend on how much you can save each month. Let’s say you already have $1,000 in your savings account. If you’re able to save $200 per month toward your down payment, you’ll have enough money saved for your $4,500 down payment in less than a year and a half!