Coming up with enough money to put down when buying a house can be a major hurdle for most hopeful homebuyers. However, saving for a down payment doesn’t have to be so daunting. To make things easier, we asked financial experts to weigh in with their best tips to help homebuyers get on-track with saving.
1. Start now and be consistent
Like anything in life, upfront pain leads to long-term gain. You can’t lose 20 pounds in a day and you can’t save for a down payment overnight. Slow and steady savings and doing without at times will get you to your goal faster.
– Mitchell S. Kraus, CFP®, CLU, ChFC, CAP®, Capital Intelligence Associates
2. Set clear goals
When saving for a down payment on a home, it’s important to have a clear goal of how much you need to save and the time frame you have to save it. Everyone’s situation is different, but in general, the longer you have to save, the more aggressive you can be with your investments. I suggest you save at least enough to make a 20 percent down payment on your home, and if you have a longer time frame, a short term municipal bond fund can make a good alternative investment vehicle for the down payment.
– Lisa P. Zarkin, CFP®, PlanSmart Financial Services
3. Borrow from your 401(k)
If you have a steady job that you intend to keep and are a good saver, certain retirement plans like a 401(k), may allow for you to take a loan for the lesser of 50% of your plan balance or $50,000. While you will need to pay interest on the loan, the interest you pay is to your retirement account for borrowing the funds. You typically have up to 5 years to repay the loan for a home purchase, but you would need to repay within 60 days if you leave your job before the loan is repaid.
– Eric Furey, CFP®, CFA, Accretive Wealth Partners
Borrowing from your 401(k) can help to supplement any cash that you may already have, and can help you avoid having to pay Private Mortgage Insurance (PMI) if you don’t have the full 20 percent in cash. It also prevents the amount of this “loan” from being reported to your credit.
– Thiago Glieger, AIF®, ChFEBC℠, Risk Management Group
4. Consider short-term loans
For those in or near retirement looking to put money down on a house, accessing large amounts of money from your 401(k) or IRA can be problematic. Since withdrawals from an IRA are treated as taxable income, taking an extra $50,000 or more can bump you up into a higher tax bracket, and lead to a big tax bill. It’s not unusual for it to be cheaper to take out a short-term loan for the down payment, such as a 5/1 ARM, in order to spread out the tax liability.
– Matt Hylland, Arnold and Mote Wealth Management
5. Take advantage of the annual exclusion gift
Inform your parents and grandparents of the annual exclusion gift. They can give you up to $15,000 per person, per year.
– Morgan R. Christen, CFA, CFP®, MBA, CDFA, Spinnaker Investment Group
6. Find more work
Driving for Uber or utilizing your skillset on sites like UpWork helps you earn extra money that could be saved for a down payment.
– Angela Smith, CFP®, Durbin Bennett Private Wealth Management
7. Set up automatic transfers
Set your goal and automate the process so that money is being set aside on a weekly or monthly basis. In addition, for those who want to save while doing a little good – you might consider using a credit union.
– Maggie Kulyk, CRPC®, Chartered SRI CounselorTM, CEO and Founder, Chicory Wealth
Know your down-payment budget range ahead of time, Set up a separate savings account, the day after your paycheck hits, draft the monthly amount (budget divided by months left till need, e.g. $40,000/24 months= $1666).
– Dustin Granger, CFP®, Toujours Planning
8. Make small lifestyle changes
Look at your budget and identify additional ways to save: buy groceries and cook, meal prep for lunch the next day, and enjoy activities at home.
– Brian Fry, CFP®, Safe Landing Financial
Remember, it is the little things that matter. Take your coffee habit – say you spend $5 a day, 7 days a week going to the coffee shop. That alone would be $1,820 a year!
– Paul K Doak, CFP®, ID Financial
9. Use an automated expense tracker
It’s hard to know where you can cut unnecessary or wasteful expenses (that can go towards your down payment) if you don’t have an automated way to find them. This is why I suggest using an automated expense tracking tool such as Tiller to help easily detect areas where you can trim the fat on your spending. Nobody wants to manually enter their receipts to find this out, so use one of these automated tools to save you hours, and potentially hundreds of dollars every month.
– Kornel Szrejber, Build Wealth Canada
10. Work with a CFP®
I feel confident that the best way to save enough money for real estate purchases or any big investments is to work with a CFP® professional. This is because the average investor and financial consultant do not know how to calculate dividend weighted averages, send income and dividends to an insured cash account, how to interpret qualified plan loan documents and rules, how to interpret Internal Revenue Codes, Trusts, etc. Additionally, a CERTIFIED FINANCIAL PLANNER ™ can help an investor manage businesses, debt and income to optimize big purchases.
– Lisa Ditkowsky, CFP®, President, Pllush Capital Management
11. Plan for your household cash flow early
A down payment is only half the battle when it comes to a home purchase, as clients tend to focus less on the cash flow requirements following the purchase. You should calculate what your current rental cash flow is (e.g. $1,500 per month), and what your cash flow would be following your home purchase (e.g. $2,500 per month). Set up an automatic savings plan for the $1,000 difference and have it deposited directly into your tax-efficient savings account to ensure that you can comfortably handle the monthly cash flow bump and increase your savings at the same time.
– Eric Vallee, CPA, CA, Novel Financial