Strategies to Effectively Save for Your Home Down Payment
When you’re ready to purchase a home, saving enough for the down payment is imperative to obtaining mortgage loan approval and keeping monthly mortgage payments affordable. And, while the expensive price tag associated with Bay Area homeownership has led to exciting BMR homeownership programs, these programs still require future homebuyers to have specific amounts available for their down payment.
For example, here at 400 China Basin, most buyers must have available funds equaling 3% or more of the total home price as a down payment. So, if the unit costs $375,000, you'd need proof of funds totaling at least $11,250.
10 Ways to Save Money For Your Down Payment
Remember that after you purchase your home, you're still responsible for things like closing costs, HOA dues, and certain portions of future home maintenance costs. In other words, having enough to make a mortgage payment isn't always considered enough to buy a home. But don't let that scare you!
Fortunately, there are several strategies you can use to start saving more money than you ever have before. By getting creative, skimping here, and saving a little more there, you'll have enough money to make a down payment while building healthy financial habits that continue growing your savings account.
Get Empowered & Save What You Need with These 10 Expert Money-Saving Strategies
Here are 10 expert money-saving strategies to help you save enough to put down on your dream home - with extra money for emergencies.
1. Schedule an appointment with a fee-based financial planner
The Bay Area is chock-full of financial planners dedicated to helping people just like you. Contrary to what you may think, many financial planners help low- and middle-income earners learn more about their financial reality and help them create a sound financial plan to build generational wealth.
These money experts use a fee-based model, meaning you pay them an hourly rate. Unlike financial planners who make their money based on what you earn through their investments (which tempts them to make riskier decisions on your behalf), fee-based financial planners only make money for the time they spend helping you.
Also, some fee-based financial planners offer sliding-scale fees for a set number of clients each year. So, if you let them know you're trying to save for a down payment on a BMR property in San Francisco, they may offer you a "sliding scale" that sets their hourly fee in relationship with your annual earnings.
Things to Look For When Hiring a Financial Planner
Not all financial planners are created equal. Here are things to look for when choosing a financial planner to help you save money for your down payment and future retirement.
Their credentials. You want someone with bona-fide credentials that you can verify through the governing agencies. This includes looking for professionals who advertise they are chartered financial analysts (CFAs) or Certified Financial Planners (CFPs), both of whom have been through rigorous education and training in addition to passing their exams and continuing their education for the rest of their career.
Ensuring they're fee-based. Again, fee-based financial planners truly have your best interests at heart. They make their money via an hourly or service-based wage (just like you). Some may also sell certain services or take a cut of any investments they manage for you - and that's fine. However, for now, you should only be paying a fee-based rate to get yourself started on a savings plan that aligns with your home-buying goals.
They speak your language. We mean this literally and figuratively. If you're a non-native English speaker, we recommend seeking financial support from a certified financial analyst or planner who speaks your native language to rule out any misunderstandings. And, whatever language they speak, you want to ensure they provide clear information and are always happy to patiently answer any questions and concerns. They are there to empower you to learn to become financially healthy and informed.
They can help you create an actionable plan. You want someone willing to start with you from the beginning and who can provide a plan - and actionable timeline - to get you to your final goal.
You feel comfortable with them. If you feel intimidated or offended, move on. Most financial experts provide free, 30-minute consultations or discovery sessions where you can speak with one another and see if it's a right fit. Only work with people to help you plan your financial future if you feel comfortable with them and trust them completely.
2. Take Advantage of Free Financial Planning Services
If you can't afford a fee-based financial planner (yet!), take advantage of free money planning services in the area. For example, San Francisco's Office Of Financial Empowerment provided FREE financial counseling and support for adults who live and work in San Francisco.
If you live in San Francisco, call 3-1-1. Otherwise, you can call 415-701-2311 to learn more about their services, which include:
Helping you find free, safe bank accounts.
Financial counseling so you can achieve your goals (like becoming a homeowner with a sufficient down payment).
Saving for college.
And more.
Also, don't forget about friends, colleagues, or family members that you trust. If you know someone who is financially savvy, odds are they'll be happy to help you learn how to create a budget and begin saving for your house down payment.
3. Understand Credit Scores: Good Debt vs. Bad Debt
Your credit score is a number between 300 and 850 (300 is bad, and 850 is excellent) used by creditors to assess your financial health and whether you're responsible with money. The former helps when it comes to qualifying for mortgages and saving for down payments; the latter keeps you from ever being able to purchase a home or save what you need for a more secure financial future.
Your total credit score takes into account:
Debt-to-Income ratio
An individual's debt-to-income (DTI) ratio is a percentage determined by your total monthly debt (including rent or mortgage payments) divided by total monthly earnings. Mortgage lenders are the most apt to lend money - or provide lower interest rates - to those with debt-to-income ratios of 42% or less (although they prefer DTIs to be less than 35%).
Good debt is...
Lenders and creditors consider "good credit" to be any debt that can increase your net worth. Examples of "good debt" are:
Mortgage debt
Student loans (people with college degrees tend to be more employable and earn higher salaries).
Auto loans (within reason - if you have a Mercedes car payment but make a Hyundai income, this could count against you).
Credit cards or revolving lines of credit you've had for a long time and with low to zero balances.
Bad debt is...
Examples of bad debt are:
Excessive auto loan payments (that take up too much of your DTI ratio, which is a sign you live above your means).
Lots of revolving credit card and credit line debt that is never paid off.
Anything debt that's gone into collections.
And, of course, if you have lots of late payments or missing payments listed on your credit history, they take a toll on your credit score as well.
Home lenders are more likely to give you a home loan if your credit score is 620 or higher; you'll get the best mortgage rates if your score is 700+.
4. Be Smart With Credit Cards
Credit cards are an essential part of building healthy credit and a positive credit score - both of which are required to qualify for home loans. However, credit cards make it way too easy to purchase things you don't need - including dinners out, vacations, or other items.
In the financial world, we call this "living above your means." To be truly financially healthy, you should use your cards to build credit - or accumulate airline or other bonus points - but you should also be able to pay your statement balance in full. If you can't, it's a sign you're spending more than you make and that is bad for your DTI and credit score.
If you're in a situation where credit card balances get higher - rather than lower - every month, it's time to take that bull by the horns.
BONUS TIP: Talk To Your Employer About Debt Paydown Options
Did you know that some employers help their employees pay down their debt via interest-free loans or loan forgiveness programs? Depending on your company, they may help you pay student loan debts or offer other paydown programs that notably reduce the money (or interest rates) you pay on current balances.
5. Look Into Down Payment Assistance Programs
San Francisco realizes that affordability is an issue, and they're working hard to fund programs that address the issue. One program that helps prospective buyers achieve their savings goal is the down payment assistance program (DALP).
According to their website:
DALP provides down payment assistance of up to $500,000 to help low- to middle-income first-time homebuyers purchase a market-rate property in San Francisco. This loan is intended to be used for the down payment on a property that will become a primary residence.
Other entities that may offer down payment assistance to qualifying applicants include:
The U.S.D.A.
U.S. Veteran's Administration (VA)
United States Federal Housing Administration (FHA)
HUD (look into DPA One by Freddie Mac)
Etc.
Even if you're not ready to purchase a home just yet, check in with BMR properties. They have teams of housing counselors, buyer's advocates, and sales agents, all with substantial BMR experience. In addition to helping you learn more about the conditions of a BMR sale, they'll provide information about other agencies or organizations that provide down payment assistance via loans and grants.
6. Create a Strict Monthly Budget
Building your down payment fund - or any type of savings account - almost always requires some type of budget strategy. There are exponential benefits to creating a budget and leading a more frugal lifestyle.
The first step in creating a budget is accounting for every dollar in - and every dollar out - in a typical month. The more precise you are about money spent, the more accurate your budget will be. Most people working with financial counselors to create a budget are absolutely shocked to learn how much they spend on things like:
Daily coffee.
Fast food lunches.
Unhealthy snacks.
Subscriptions they rarely or no longer use.
Unnecessary shopping for clothes, shoes, or accessories.
And so on.
If you're surprised by what you spend, you'll be even more surprised when you add all that unnecessary spending up and realize how much you can add to your savings accounts by cutting or minimizing those expenditures.
These days, there are so many fantastic tools available to help you out online or via budgeting apps. Read Nerd Wallet's recommendations for Free Budget Spreadsheets, choose one, and get started.
These software programs use mathematical algorithms and calculators to generate monthly budgets aligned with your savings goals. Many offer other financial tips and tricks to help you get ahead. In addition to increasing the growth of savings or checking accounts, you'll gain a whole new grasp of finances, what it takes to be fiscally healthy, and how to avoid spending money on necessary purchases.
7. Make Savings Accounts Work For You Via Higher Interest Rates
Traditional savings accounts are notorious for their dismally low-interest rates. However, there are other higher-interest-earning accounts out there. Contributions into high-interest-yielding accounts help you save more money in less time.
Types of accounts known for providing a better return on your investment include:
Non-traditional savings accounts
Start shopping around for banks offering higher interest rates or deals on how to earn more. For example, some banks offer to add additional funds to your bank to open an account with them and keep a minimum balance for a set time. By doing so, you can earn quite a bit in a short amount of time.
Credit unions also tend to have higher savings account interest rates than other banks. A local financial planner may have other recommendations based on their research and industry information.
Certificate of deposit (CD) accounts
CD rates vary from bank to bank, as do their term lengths. If you know you won't be buying a home for at least six months from now or more, start shopping for CDs that sync with your goals.
Be mindful before opening a CD because you cannot make a withdrawal ahead of the specified date without paying a penalty, nor do you reap the benefit of the higher rate until the CD fully matures. So, a CD is NOT where you want to put your emergency fund or any savings you'd need to have access to unexpectedly.
Money market accounts
A money market account is a popular option for people growing their savings by taking advantage of the stock market but without losing access to the funds. The more money you have in the account - and the longer it's there - the more you benefit. However, you can take your money out of the account at any time, depending on the account's terms.
8. Take Advantage of Family Gifts or Contributions
There are several ways you can convert family gifts or contributions into your down payment fund:
Gift money is no longer fun money
Do you routinely receive birthday or holiday money from relatives? If so, don't consider this fun money anymore. Now, that money should be viewed as a contribution toward your down payment amount or any other funds required during the BMR homebuying process.
Request down payment contributions rather than gifts
Or, if you typically receive physical gifts, consider asking relatives to convert what they'd spend into a savings account deposit for you. Once you share your dream of home ownership - and your down payment goal - you may find that loved ones and friends contribute more than they would have spent to help you reach your goal.
Ask parents and grandparents how they feel about helping out
The American Tradition focuses on amassing property and wealth that is distributed after we die. However, there are several tax advantages to flipping the script and distributing our wealth before we die.
If you feel comfortable doing so, speak to your parents or grandparents about your goal. Your financial planner or counselor can also provide you with helpful information about the tax benefits of gifting money in tax-free lump sums as part of healthy estate planning.
You could also make it known that you're happy for whatever they contribute now to be subtracted from whatever you would inherit later to make it fair for other heirs and beneficiaries. Even a significant one-time contribution could yield the thousands you need to pay off debts or achieve your down payment needs.
Take out a small loan
If your family is uncomfortable about that or money gifts are not the norm, ask if they'd be willing to make a small, interest-free loan. Make it official with a signed loan agreement, including the loan terms. And remember, homeownership benefits you when it comes to taxes, so you may be able to pay the loan sooner than expected if get money back on your tax return.
9. Ask HR About Using Retirement Savings
First, we want to emphasize that borrowers should never use retirement savings unless you've received professional advice from your employer's HR department, the account administrator, or an experienced financial advisor.
That said, in some cases, purchasing a home is one of the circumstances that can qualify you to take money from a retirement account penalty-free, as long as it's used for the down payment or other specific expenses related to real estate expenses. For example, you may be able to tap your IRA account as long as you are a first-time homebuyer (something that's already one of the stipulations for purchasing BMR units).
Again, speak to banking or other qualified financial expert before using retirement funds to purchase a home.
10. Think About Short-Term Ways to Bring in Extra
Finally, once you reach your down payment goal, you'll be able to relax a little more. If you're planning to buy a home in the next six months to a couple of years from now, brainstorm ways to earn extra cash via additional part-time jobs or a legal side-hustle.
This is a smart way to pay down debt or tackle other large bills that prevent you from saving the money you need.
Examples include:
Becoming a driver for Uber or other ridesharing apps.
Rent a room in your apartment for travelers or a short-term lease (you can work at your kitchen table in the meantime).
Take on a shift or two doing something like bartending, serving, or other jobs that make tips and pocket a little extra (this also saves you from spending money on weekend evenings).
Tutor a subject you're good at and make anywhere from $25 to $50 an hour or more, depending on the subject and students.
Read PennyHoarder's post, 50 (Legal) Ways to Boost Your Bank Account This Week, for more ideas.
Need Help Saving Enough For Your BMR Unit's Down Payment?
Are you interested in learning more strategies or personalized ways to effectively save for your home down payment? Visit us here at 400 China Basin. We're gearing up to sell affordable units in one of San Francisco Bay's most desirable waterfront areas.
Our experienced and friendly sales team is here to help people like you make their homebuying dreams a reality while still ensuring they have money left over after payday. Contact us to get on our list!
