Saving for a down payment is often the biggest hurdle for a first-time homebuyer. Depending on where you live, median income, median rents, and home prices all vary. So, we set out to find out how long it would take to save for a down payment in each state.
Using data from the United States Census Bureau and Zillow, we determined how long it would take, nationwide, for a first-time buyer to save enough money for a down payment on their dream home. There is a long-standing ‘rule’ that a household should not pay more than 28% of their income on their monthly housing expense.
By determining the percentage of income spent renting in each state, and the amount needed for a 3% down payment, we were able to establish how long (in years) it would take for an average resident to save enough money to buy a home of their own.
What if you only needed to save 3%?
What if you were able to take advantage of one of Freddie Mac’s or Fannie Mae’s 3%-down programs? Suddenly, saving for a down payment no longer takes 5 or 10 years, but becomes possible in a year or two in many states as shown on the map below.
Ways to save for a down payment
Here are some ways to help make sure you have enough money when it's time to get your mortgage.
1. Transfer a fixed amount into a savings account every month.
This is the most popular—and convenient—way to save. Set up an automatic direct deposit into a savings account. Commit to never use these savings for any purpose other than your down payment.
2. Skip vacations for a year.
If you save the money you would have spent vacationing, you can make significant contributions toward a down payment.
3. Lower your expenses.
Review your expenses and look for what you can reduce or eliminate. Put the money you would have spent on these items into your down payment savings account.
4. Reduce your high interest rate debt.
High interest rates on credit cards can seriously limit your ability to save. Pay off your high interest rate credit cards. Start with your highest interest rate card; when you've paid the entire balance, close the card, and proceed to pay off the next. At a minimum, transfer your credit card balances to the card with the lowest interest rate.
5. Borrow from a relative.
Many parents or relatives help out when it's time to buy a first home. Gifts can come from your family, spouse or a domestic partner. Just be sure to include the amount of the gift on your loan application.
6. Borrow from your retirement plan.
Look for penalty-free withdrawals for home buyers in your plan. Many company-sponsored 401(k) or profit-sharing plans allow employees to borrow against their savings to purchase a home. Your Human Resources or Payroll department can help.
7. Sell some of your investments.
Think of this simply as a way to move some of your current investments into another investment vehicle – your home! As you make payments on your mortgage, you accrue equity in your home. As the value of the home increases, so does the return on your investment.
8. Get a second job.
Even temporarily, earnings from a second job can help you make substantial contributions to your down payment savings.
9. Look into down payment assistance.
Some organizations might help you with your down payment. See if you qualify with the Federal Housing Administration, the US Department of Agriculture Rural Housing Service and the Veterans Administration. Also check out local housing authorities to see if they have programs to help.
Bottom Line
Whether you have just started to save for a down payment, or have been saving for years, you may be closer to your dream home than you think! Let’s meet up so I can help you evaluate your ability to buy today.
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