5 Ways to Save Money to Buy a House
February 28, 2013
Saving money to buy a house can be difficult if you are not a saver by nature. And it’s usually not a small amount of money either. Unfortunately, down payment requirements are higher now than they were a few years ago. If you’re purchasing a house for $200,000, a 5% down payment will mean $10,000. A 20% down payment will mean $40,000.
And that’s not all.
You may also be required to pay some or all of the closing costs on the purchase, as well as to establish escrow accounts for taxes and insurance. In addition, mortgage lenders typically require that you have cash reserves after closing. The requirement will generally be for an amount equal to anywhere from two to six months of house payments on the new home.
Taken together, a 5% down payment ($10,000), $3,000 in closing costs, plus $2,000 to establish your escrow account, plus $3,000 in cash reserves will mean that you will need $18,000 in total.
For most people, that’s serious money, and it will take an effort on multiple fronts. Here are some suggestions . . . .
1. Live on one paycheck – bank the other.
If you are the typical two income household, this can be the most effective way to save a lot of money in a hurry. You can live on the larger of the two incomes, and use the smaller for saving up your down payment. Let’s say that the smaller income produces a net of $2,000 per month; if your goal is to save $18,000, you will reach it in nine months using this method.
Obviously you won’t be able to do this without making substantial changes in your cost of living. You will need to cut costs wherever you can, and even then you may find that you will be unable to bank the entire second paycheck. If that’s the case, you’ll have to use other methods in addition, depending on what your time frame is for reaching your goal.
2. Sell everything that isn’t absolutely necessary.
One way to fast-forward your savings is to sell as many personal possessions as you can. This can mean selling furniture, recreational equipment, fitness equipment and even jewelry and other personal possessions. You can also sell smaller items through periodic garage sales.
3. Cut every expense that isn’t absolutely necessary.
This is an excellent time to begin cutting as many expenses as you can. Most of us have ongoing expenses that we can get rid of. Cable TV is one example, so are landline telephones, gym memberships, unlimited cell phone service and any other ongoing service that you don’t absolutely need.
At best you may only be able save $200-$300 per month, but over the course of a full year that will add up to a minimum $2,400. That will be a nice supplement to other efforts.
4. Bank tax refunds and bonus checks.
Since the average income tax refund is over $3,000, putting it straight into savings is one of the best ways to reach your goal faster.
You can also plan to save any other major lump-sum payments you receive, such as bonuses. If you have a nice profit on some stocks you’re holding – and they’re not in a tax-sheltered retirement plan – now might be a good time to sell them. Even if you believe they will continue to rise in price, since you’ll be using the proceeds to buy a house, think of it as moving your money from one investment to another.
5. Get a second job and direct deposit your pay into savings.
If you aren’t in a two income household, this may become a necessary option. After you’ve cut all the corners that you can and liquidated everything that isn’t tied down, sometimes you still need to find an additional income source to build up your savings.
A part-time job that provides $500 per month will enable you to save an additional $3,000 in six months, or $6,000 in 12 months.
Bonus Tip: Give yourself plenty of time.
One of the reasons people find it so difficult to save money to buy a house is that they don’t allow themselves enough time to do it. Be sure that you give yourself a reasonable amount of time to accumulate the money you need so that you aren’t breaking open cookie jars, pawning family heirlooms, or getting loans from relatives at the last minute.
In today’s tighter mortgage market there’s an even better reason to not wait until the last-minute. Mortgage lenders are very suspicious of money that shows up only days or weeks before the loan application. They will assume that this money has been borrowed – and that it will require a repayment that isn’t disclosed on the loan application. That is, unless you can prove otherwise (not always so easy!).
In the mortgage world, this is referred to as “source of funds” documentation. If you do get money from family members, or sell off any personal assets, you’ll need to have a very specific paper trail proving that that is exactly what happened. This process can be very tedious, and is one of the biggest reasons why people believe they are being worked over by a mortgage lender.
You can avoid the entire hassle by making sure that you’ve completed your most significant money moves at least 60 days before you make your mortgage application.
What are you doing to save money for the down payment on a house? Or what did you do to make the down payment on the house you already own?
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All posts by Kevin Mercadante