It might seem impossible, but millennials are buying homes – and affording them.
· Determine how much you need to save for your downpayment
· Find out how to save for a house
· Save money using apps and asking family for financial help
· Create a monthly budget, move invested money into your downpayment
· Downsize your current living space, sell things you don’t need
Despite steadily rising housing prices, millennials continue to dominate the homebuying market, qualify for stricter loan standards, and save up for significant down payments.
Why down payments matter
Your down payment is the cash you’re bringing to the table when buying a home. If you’re looking to get a house with a mortgage (loan), the down payment will show lenders that you’re financially capable of coming up with money. It also helps you save on your monthly payments, as your down payment lowers the total amount you have to borrow to purchase a home.
With down payments being typically 20% of the home price (but as low as 3.5% or even 0% based off of the loan you qualify for), it means in a hot market such as Los Angeles where the median home price is $580,000, buyers need to pony up $116,000.
The not-so-dirty secret
In this market, many first-time home buyers get some of the money for their down payment from family. If your family is willing to lend you down payment funds at a low or zero-interest rate, you could save thousands in interest payments over time. Best case scenario, they provide a gifted down payment, but there are tax implications you should be aware of.
But, what if you don’t have family members lining up to lend you cash?
What’s a first-time homebuyer to do?
Millennials, who make up the majority of first-time homebuyers, are getting scrappy and clever with ways to save for down payments. They embrace apps that disrupt markets to make services more affordable — as seen with Amazon, Uber, and a myriad of apps — and are applying these learnings to make their house hunt more affordable.
Shocker: you might not even have to move back in with your parents (even though that could save you thousands of dollars a year, so…).
Know how much to save for a house
Before we break down how to save for a house, it’s important to understand how much you need to save.
According to the California Association of Realtors, the median price of existing homes sold in August of 2017 was $565,330. Let’s use that as an example to understand how large the down payment might be that you save for a house:
Home Price: $565,330
20% Down: $113,066
10% Down: $56,533
5% Down: $28,266.5
While the standard downpayment is 20%, you can always put down more if you have it. The more you put down on your home, the lower your monthly payments are going to be. It all depends on how much home you can comfortably afford – and that’s important to keep in mind since you don’t want to buy something out of your price range.
For any specific home prices you think are in your price range, you should consult a down payment calculator to determine how much you should save for a down payment.
Know how long saving will take
Once you have a rough idea of how to save for a house, you need to create a timeline for about how long it will take to reach that goal.
The California median income in 2016 was $66,637, so let’s use an example where a home buyer with that income wants to purchase a home at the median price:
If the home buyer in our example wants to save for a 10% downpayment on an average home, they would need to save $56,533. By saving 20% of their annual income (or $13,327), this home buyer would have enough for a 10% downpayment in just over 4 years.
It’s unlikely that your situation is identical to the national average, so you should set your own realistic expectations.
Also, the amount you save in any week, month or year can change, and you can easily increase your savings by a significant amount…which brings us to tips to use when saving for your downpayment.
The best ways to save for a house
There are many ways to make money after moving into your new home. Many first-time homebuyers will Airbnb out spare rooms in their home, or they’ll find extra ways of making money through the gig economy or apps.
But even with the right app and some extra income, you still need your down payment money up front — and there are some great hacks to saving for a new home.
1. Create a monthly budget and automate payments to savings
We’ll get the boring yet important tip out of the way first:
YOU NEED A BUDGET.
Cut the fat from your expenses. It isn’t sexy, but it works. Eat out less, purchase fewer items that aren’t “essential,” and while we’re not advocating for zero fun, it’s important to minimize the $5 lattes or $14 cocktails.
Make saving easier than spending. Out of sight, out of mind, right? Set up an automatic savings account. If you’re paid via direct deposit, send some of that money to an account that isn’t your checking. Use micro-savings apps like Acorns or Digit. The harder it is to find and spend, the better.
2. Contribute less to your 401k
Say what? Taking money away from your savings can seem scary. But, your new home isn’t just a house, it’s an investment — and the only investment you can sleep in.
From June 2016 to June 2017, home prices rose by an average of 5.8% across the United States. That short-term ROI isn't too shabby.
3. Downsize for a short time
Odds are that you’re currently renting a place. No matter how much you love it, if you’re thinking about home ownership, you clearly don’t want to live there as badly as you want own.
Downsizing your current place, or dealing with a roommate for a little bit, will quickly help you save for a house. Even if you’re just paying $200 less a month in rent, it adds up to $2,400 more for your down payment each year.
4. Sell things you don’t need
RemeMake eBay, Craigslist, and OfferUp your new best friends. Most people have objects laying around that go unused. There’s bound to be someone out there who is willing to pay for your stuff, right?
Not only will you make some money selling things you don’t need, but you’ll also get rid of items that will inevitably have to be moved to your new home.
5. Invest responsibly and over a longer period of time
If you’re investing (and you should be), you might need to make some changes to your habits.
Instead of putting your money in riskier, short-term investments, move it to long-term, safe investments. Some longer-term investments (think one or two years) should yield you some extra cash that can be put down when it comes time to buy a home.
Some longer-term investments (think one or two years) should yield you some extra cash that can be put down when it comes time to buy a home.
6. Open a high-yield savings account
Money that’s sitting around in your checking account isn’t going to do you any good. Without any effort, that money can be making you even more money.
High-yield savings accounts are exactly what they sound like – accounts where you save your money and get a nice return. It’s easy to find these accounts. While you won’t be making life-changing sums of money, you’ll be making enough to help put a dent in your down payment.
7. Consider a Certificate of Deposit
A certificate of deposit (CD) is a deposit where you can’t touch your money until it matures. In return, you’ll get a guaranteed percentage back on your investment.
CDs can range from a few months to multiple years, so you should pick one based on your timeline for buying a home. Regardless of your situation, this is something you should do right off the bat with any money you have that isn’t invested.
Start planning now
Saving for a downpayment might seem like an impossible task, but first-time home buyers have regularly figured out how to save for a house.
Everyone’s situation is different, but with the right decisions and a little bit of time, you can easily save enough to put down money on a home.
Depending on the type of loan you get and your credit, you’ll likely need to make a downpayment of at least 3.5%; however, downpayments of 20% are more traditional and recommended to keep monthly payments down and avoid mortgage insurance.