Saving for a down payment on your first (or next) home can be a daunting task. For good reason… it may be the single largest investment you ever make and if you are not already a habitual saver, then you may have some work to do.
NO NEED TO WORRY…
Here are some tips, tricks, and methods to help bring you to your goal of home ownership sooner.
1. Automatic Savings
This is my favorite funding source for saving. I know, it sounds super obvious… just set up an automatic transfer, right?
Well… YES… but it’s more powerful than you may think.
Your automatic savings account should meet do the follow:
- Separate online savings – with specific purpose (i.e. down payment)
- Be accessible online
- not linked to your primary checking (to avoid misuse of funds)
- take 1-2 business days to transfer (this will ensure you think through your
Once you have your account set up, it’s time to setup your automatic savings plan with a payroll deduction through your employers HR department or an automatic online transfer.
Simply determine the amount you would like to transfer, the frequency of the transfers (ie. Each paycheck or possibly once per month), and then get it established.
Once its setup, you can sit back and watch your account balance increase over time.
2. 401K/retirement accounts
Taping into retirement funds can be a great way to help fund the down payment for your first home if you are wanting or needing to purchase in the near term. Although these funds can be useful, you will want to examine the pros and cons and consult a tax professional prior to moving forward.
Side note, a mortgage underwriter will only qualify 70% of your available funds in a retirement account until they are converted into cash (ie. If you have $100k, then the underwriter will only use $70k for qualifying purposes)…Just something to keep in mind.
Listed below are a few ways to access the retirement stash:
Borrow the funds
Some 401K administrators will allow you to borrow up to 50% of your 401k balance and use it for the down payment of a primary residence. Fidelity Investments will currently allow you to borrower up to 50% of your account balance and then pay it back to yourself over 15yrs. They do charge fees for this, so be sure and read the fine print.
Withdraw the funds
This may come with some tax consequences so be sure and check with your CPA or financial planner prior to pulling any funds. Here are a couple things to consider:
- 10% Penalty: If you are younger than 59 ½ years old (current retirement age), the amount you pull out of your account will be subject to a 10% penalty.
- Income Tax: If you have been contributing to a 401k account with pre-tax dollars, then any withdrawal is considered income and the IRS will collect the tax they originally differed. If you are in a 25% income tax bracket, 25% of the funds you take out will go to the IRS.
First Time Buyer:
If you are a first time buyer (no ownership interest in real estate within the last 3yrs) and you are buying a primary residence, then you may be eligible to withdraw up to $10,000 in your 401K or IRA without the early withdrawal penalty of 10%. Keep in mind, the funds will still be subject to income tax (assuming you contribute pre-tax dollars). Again, its best to check with your CPA and review your personal financial situation.
3. Investment Accounts
This would include stocks, bonds, mutual funds, employee stock plans, etc. Basically, any online brokerage account where you carry these types of investments can be used to help fund your home purchase.
The same 70% rule applies when qualifying for a mortgage (The underwriter will only qualify based on 70% of the accounts value). So if you intend to use these funds, you may need to consider your timing for liquidation. Best to consult your CPA, financial planner, and mortgage consultant.
4. Gift Funds
Great news!… The down payment funds don’t always need to come directly from you.
If you have some very generous parents, grandparents, siblings, or spouse/domestic partner, they can gift you a portion of the down payment. What a wonderful housing warming present, right?
Keep in mind, these funds cannot come from just anyone though… cousins, friends, managers, and co-workers are not acceptable donors. Check with you mortgage professional for rules, restrictions, guidelines, and required documentation.
5. Sell yo’ stuff
Another funding source (commonly overlooked) is your ability to raise funds by selling some of your old stuff. General rule of thumb, if you haven’t used something in over a year, then you probably aren’t going back to it (just my thought).
Maybe you have a really nice road bike you never ride any more, or an extra car laying around that you no longer drive (bonus on the monthly insurance savings for this one), or tools, or clothes, or furniture….
The list goes on and on…
Set up a garage sale, post on craigslist, or list your items on ebay… it’s time to convert your junk into cold hard cash.
6. Reduce your expenses
Ever hear the term, “leaking money?”
If you haven’t… don’t feel bad. This is something we all do to a certain extent. Leaking money refers to the small amounts of dollars we spend on things that are “wants” as opposed to “needs.” It’s the $5 Latte’s, the vending machine snacks, the soda with your lunch, the eating out, the happy hour’s…. basically all the fun stuff J. Over time, these small expenses can add up to a substantial amount of money.
Weekly happy hours aside… we all reach a point where our priorities shift and we begin to take an interest in “adult” stuff like buying a home, getting married, and starting a family. Perhaps now is a good time to evaluate your goals and priorities… blah blah blah, yes I know… getting older comes with more responsibility.
Before you purchase your first home, sit down (with your spouse/partner if you have one) and review your spending. Looking at your bank statements and review all the transactions. Jot down the different areas where you’re spending and see what the results reveal. I promise you will find areas where you can cut back.
Also, review all of your subscriptions, utilities, and service providers (Internet service, phone bill, gym membership, Netflix, hulu, amazon prime, Audible, etc). Perhaps you can downgrade your plan and/or cancel the service all together to free up some extra coin.
Lowering your expenses is one of the best ways to quickly save more money.
7. Increase your income
Look for ways to increase your current income. If possible, start by doing everything you can with your current employer. Maybe you can work an extra shift, take on extra responsibilities, or sell more product. The idea is to make yourself more valuable to your employer… more value… more $$$.
Once you have maximized the opportunity with your current employer, a side hustle may be in order. Do you have a special skill that you are really great at? Maybe you can be an online freelancer and edit resumes for job seekers, or work a part time job serving at a local restaurant or bar, be an uber/lyft driver, etc.
There are plenty of opportunities for part-time work if you are willing to grind it out.
Seek opportunities that will put money in your pocket consistently and allow flexibility so that you can continue to maintain gainful employment with your primary gig.
Well, there ya have it… sell some stuff, reduce expenses, increase income, setup a special savings account, make it automatic, and if it applies to you… consider leveraging your 401K or using gift funds.
Lastly, be patient and consistent… you will reach your down payment savings goals faster than you think.
All the best!
Want to buy, sell, or invest in real estate?
Silva Realty Team can help!
We cover Sacramento & Placer County in California with a special focus on Roseville, Rocklin, Loomis, Penryn, Lincoln, Newcastle, Orangevale, & North Natomas (Sacramento).