How to Afford a Down Payment on Your First Home

October 25, 2018 · 6 minute read

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How to Afford a Down Payment on Your First Home

Saving for a down payment when you’re simultaneously trying to pay rent, make car payments, and pay down student loans is no easy task—even if you’re making your dream salary. As the urban housing markets get more and more competitive, the cost of down payments are slipping up, up, and away.

Case in point, say you live in Los Angeles. If you were to put down 20% on a two-bedroom condo for $600,000, that would mean coming up with $120,000 in cash. Again, no easy feat when you’ve got other bills to pay.

Is 20% still the norm when it comes to down payments? For those of us wondering how to afford a down payment, there may be good news: The minimum down payment on a house can be as little as 3.5% if you qualify for an FHA home .

You can even buy a home with no money down, in some rare instances. But typically, this is only an option if you are part of the Veterans Association, or if you qualify for a USDA home loan for low-to-moderate income families purchasing homes in rural areas.

As for the average down payment on a house, 60% of first-time homebuyers put down 6% or even less. On the other hand, there are still benefits to putting down a full 20%. You don’t have to pay private mortgage insurance, and a 20% down payment is more likely to get you a manageable mortgage payment.

Smart Ways to Save Up for a Down Payment

If you’re saving for a down payment, whether it’s a 5% or a 20% down payment, here are nine ways to save for your dream home.

1. Snowflake Savings Method

The snowflake method is usually a debt payoff method that involves you putting any extra cash you have toward your debt. You can use it as a debt payoff method while you save for a house, simply because it’ll be easier to save for a down payment with less debt.

But you can also use the snowflake method as a savings method by throwing as much money as you can toward your down payment savings. Essentially, saving with the snowflake method means putting any extra cash away for a down payment. Birthday check from your great aunt? It goes into savings. Made $300 from selling old textbooks on eBay? Put it in your down payment fund.

2. Ask for a Raise

Of course, you can’t walk into your boss’s office and demand a raise because home prices are rising. Don’t get me wrong, in an ideal world, we’d all be able to do that, but it’s just not realistic.

Instead, start thinking about when the last time you got a raise was, and whether you’re honestly due for one. Talk to your manager about steps you need to take to qualify for a raise, and then get to work on those action items. This can be more of a slow play, but it can also have a big pay off if you get a substantial raise. When you get a raise, don’t scale up your lifestyle. Use most of the extra take-home pay for your down payment savings.

3. Start A Side Hustle

If boosting your income at your current job isn’t an option, you can still increase your take-home pay by taking matters into your own hands. Start side hustling in the evenings or on weekends. Side hustles aren’t all about glamour—it’s not all travel blogging and doing sponsored Instagram posts.

Sometimes it just means getting a side job at your local coffee shop, or being a dog walker. Who knows, if you’re a good enough dog walker, it might ultimately lead to Instagram fame. The point is, choose a side hustle that you can start making money from quickly, so you can redirect that cash into your house fund.

4. Ask For Contributions To Your “House Fund” At Your Wedding

If you’re getting married, and hoping to buy property afterward, you can consider asking for donations to a “house fund” instead of registering for things to fill your potential house. And there’s no rule that says you can’t register for some nice sheets and a cast iron skillet while also offering a house fund as an option.

Guests at your wedding want to invest in your future—that’s why they’re at your wedding in the first place. Showing them that you’d like to use their gift toward starting a home for your new family can be meaningful to your guests, and to you and your spouse.

5. Lower the Cost Of Your Student Loans

Making huge student loan payments each month certainly isn’t helping you set aside cash for your future home. But at the same time, aggressively paying down your student loan debt can help you as a homeowner in the long run. However, if the end of your student loan debt tunnel isn’t in close sight, there are plenty of ways to reduce the amount you pay toward student loans every month, in order to set aside some funds for a future downpayment.

One popular option – you can refinance your student loans at a potentially lower interest rate. You can even lengthen the repayment timeline for your student loans when you refinance, which can help lower the amount you pay every month.

Qualifying for a lower interest rate when you refinance, even if you keep the same terms and don’t extend your repayment timeline, might get you a lower monthly payment. With the money you’re saving each month, you can contribute more to your down payment savings.

6. Pay Off Credit Card Debt

Putting more money toward your credit card debt might seem counterintuitive if you’re trying to save for a house. But think about it this way: Credit card debt is widely regarded as the costliest debt, because interest rates on credit cards are so high.

If you can wipe your credit card debt out, it could help boost your savings in the long run. If you focus on paying it down aggressively for several months, then once you’re done, you can redirect the money you were putting toward your credit card debt toward your savings.

One way to speed up your credit card debt payoff is to apply for a loan with a lower interest rate or more attractive term. Commonly called credit card loans, these are essentially just a personal loan that offer more agreeable terms than your credit accounts.

Similar to refinancing a student loan, this may give you the option to lower the interest owed on your overall debt or lower your monthly payment. By doing so, you can not only get out of your debt faster, but also put a little more cash to your savings each month.

7. Use a CD

A certificate of deposit is an investment with the potential to gain interest. Although not risk free, the benefit of a CD is the interest rate is set when you invest. While you might not earn as much on your money as you would if you adopted an aggressive investment strategy, you’re also not subject to as much risk.

One drawback to a CD is that you may not be allowed to withdraw your money early. So if your dream house comes along a year before your money can be taken out of a CD, it might be hard to access that cash.

8. Ask Your Family Members for a Loan

Asking family for money is never fun, but there’s also no shame in gathering cash so you can build up a better down payment. It’s a competitive housing market, so if your family can help you put down a bigger down payment, it might be the difference between locking in your dream house, or looking for another three months.

9. Put Your Cash into a Higher Yielding Deposit Account

A cash management account is similar to a high-yield savings account. Instead of keeping your money in a run-of-the-mill savings account earning as little as .01% interest, you can earn more interest on your cash each year.

However, your money is not invested in the market, so you won’t get returns like you would on an investment. But on the plus side, you have access to your cash at any time. And you can use a cash management account just like you would a checking or saving account.

Looking to earn some money on your down payment savings? Open a SoFi Money account today. And if you’re in the market for a mortgage, check out a mortgage loan with SoFi, too.

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