You do not need to save 20% for the down-payment
This is probably the most common myth most homebuyers face. However, I’m here to tell you that you absolutely do not need to save up 20% down-payment to go out there to speak to get pre-approved. 20% down-payment typically is used commonly when buyers try to avoid the monthly Private Mortgage Insurance or PMI amount that they are required to pay lenders, which used to be considered a wasteful disadvantage during the home-buying process. Though this is a highly recommended things to do, this is NOT a mandatory requirement to buy a home.
Speak to a licensed loan officer
Now that you know 20% down-payment is no longer a requirement, it’s time to find out how much you actually need to save up. It’s better to have a goal than to save “as much as possible”.
Either you are a first-time home buyer or an experienced investor, the first step would be to figure out how much your monthly payment you can afford based on your monthly income and expenses. And please, be realistic to yourselves about this!
Afterward, it’s time to validate that idea by getting pre-approved or speaking to a Licensed Loan Officer about that. A Loan Officer will help you go through your financial situation at greater details, including how big of a down payment you’ll need to aim for.
If you want to go over your basic qualifications and requirements on how to qualify for a loan, read more about our article on Mortgage Guidelines here or you can reach out to mortgage@chadvorealestate.com.
Alright, We Know The End Goals! It’s Time to Start Your Saving for a House
Whether you already have a decent saving already or you are starting from scratch, here are the 8 simple but very effective steps you can use to boost your savings:
1. Review Your Monthly Expenses and Build a Better Budget
By the end of each month, have you ever wondered where all your income went? Or in a more extreme case, why your debts are more than your income? I will be the first to admit it that I have and it was not fun. Let’s think about it, if you do not know how much you’re earning and how much you’re spending per month, how can you possibly include a mortgage payment when you can barely balance everything else? But then I started a Budget Worksheet.
During this exercises, write down an extremely detailed line items of how much you (and your spouse/partner) earn per month total along with how much you typically spend per month on every single categories from major to minor. You can find these items by going over your checking and your credit card statements. I would recommend reviewing 12 months worth of previous statements. The common categories for most people out there are typically the absolute necessities such as rent, utilities, automobile, and student loan payments. Secondary, we have frequent leisure spending including dining out, entertainment, and travelling expenses. And the rest would be miscellaneous.
Believe it or not, this exercise can be intense and overwhelming. I completely understand some of us have lots of financial obligations due to different circumstances. However, this step is needed. If you need help, I highly recommend speaking to a financial advisor. If you want to do it yourself, I have a template ready for you. To download, fill out this form here writing “Budgeting Template” and our team will email it to you.
After categorizing all the line-items, confirm which categories occupy the majority of your monthly income and if they are necessary. If the categories are more of a want than a need, perhaps make a decision to lower the spending threshold there and move the excess into your saving section, a mandatory category. Still have questions? Don’t worry! Keep reading.
2. Reduce Your Expenses
Reducing expenses sounds simple but it can be quite difficult to commit to. Yes, online shopping or subscribing to a streaming service that you watch once a year can be very addicting but costly as well. Think about if you actually need those expenses. If you don’t, consider downsizing or cutting those expenses off completely.
I’m not telling you to become a complete minimalist (that would make me a hypocrite) but perhaps reduce the frequency how much you spend on those items if you can’t cut those off completely. Here’s a few bullet points to consider:
- Online Shopping: I’m very guilty of this one. Those deals can be very irresistible. But maybe buy a small item once a month instead of every week.
- Dining Out: start cooking at home during weekdays and just dine out on the weekend. Plus, cooking is a nice skill to have as well.
- Un-subscription: There are like 10+ streaming and entertaining services out there that automatically draw charges from your bank account every month. Do you really stream all of those platforms? If not, get rid of those. They may seem like small charges but they add up. Oh, and another thing to unsubscribe from? Those marketing emails that flood your inboxes with deals and coupons making you think you get good deals giving them your money.
- Simple Living: Everyone deserves to have luxurious things in life even if they don’t care about it. However, if it affects your financial situation, consider living a simpler life. And this can apply to living in a smaller space with less monthly rent or driving a less expensive car that saves gas (hybrid and electric cars FTW!)
- Quitting Bad Habits: Wanting to quit smoking or drinking for a while? You might as well just use this saving purpose as an excuse to quit.
Of course, there are other things you can do out there to cut expenses but these are the most common and effective steps you can implement and they will make big impacts on your saving rate.
3. Tackle Your Debts Strategically
Not all debts are created equally. Some debts are much worse than others in every single aspect. Therefore, we all must fully understand our debts and prioritize the worst ones to pay those first. Here’s the rules of thumb when it comes down to pay off your debts:
- Fully aware of all your debts
- Pay off debts with high interest rates first. Credit cards usually have the highest rate averaging between 17%-25% interest rate
- Refinancing your debts to a lower interest is never a bad idea (if all associating costs make sense)
- Avoid taking on more loans if you are struggling to pay off your current ones
Paying off debts is not only helping you save more money in the long run but also help you qualify for a bigger loan size as well by decreasing your debt-to-income ratio (DTI). Don’t know about DTI? You can read more about it here.
4. Increase Your Saving Rate
When I first started my savings, I had a hard time meeting my saving goal due to impulse shopping and snacking. I even withdrew funds from my emergency funds and saving accounts to buy things I didn’t need. It was not good due to my weak self-discipline! But then I tried a few strategic methods and they worked out quite well in my favor.
I asked my former boss at my first job, who I had a really good relationship with, to hold 30%-50% of my paychecks and only allow me to cash out when I absolutely need it. And he would be the one making a decision to allow me to withdraw based on my reasons at the time being. By doing so, I was able to save a large amount toward my first-home purchase. Of course, this is a very extreme case and I definitely do not recommend it to everyone. But then it got me into the mindset of automatic saving and living below my mean. Until this day, for every month, after spending on all necessities such as mortgages and groceries, I have a system that automatically allocate certain amount of money into my high-yield saving account, my retirement accounts, and my investment accounts. Additionally, all of my accounts will have some sorts of penalty if I withdraw over certain limits. By prioritizing my saving first, it forced me into a mindset of not over-spending every month.
You will be so surprised on how effective this method really is. Of course, you do not need to start off with 50% of your paycheck. You can always start small and gradually increase your saving rate. When you need it, you’ll be pleased with the result.
Of course, once again, I am not a licensed Financial Advisor so please take these bullet points with a grain of salt. And I want to pay my respect to David Bach, the author of “The Automatic Millionaire”, the book that gives me the inspiration to this method. Highly recommend to everyone.
5. Pain For Me to Say This, but Sacrifice Some of Your Leisure
Travelling and taking trips are extremely fun, relaxing, and pleasuring. However, they can be very expensive especially for most international and popular destinations. The cost of travelling can surpass thousands of dollars, which is a lot of money to majority of us.
Sadly, if you are in the process of saving for a home, going on trips is something you should consider cutting back. As much as I highly encourage others to travel now to keep an open-mind and stay relaxed, it’s certainly not the most cost-effective option.
However, you can always explore other options that yield similar returns but don’t break your bank accounts. For example, instead of taking a trip to Europe, you can go on a cruise, which may cost only a fraction in comparison with enough research. Another option would be to explore National Parks or historical sites within drivable distances if you want a quick getaway. And if you want to experience other cultural activities, partaking some activities locally relating to those cultures, such as cooking classes for specific cuisines or going to a museum, can also be reasonable options.
6. ASK YOUR MANAGER FOR A RAISE AND/OR EXPLORE OTHER OPTIONS ON THE JOB MARKET
Just like running a business, in order to increase your profit margin, besides cutting your expenses, you can also increase the amount of income you’re bringing in. For most of us, to achieve this goal, we need to speak up at our workplace and ask for a well-deserved raise. I typically am not a fan of comparing salaries with your colleagues but at least make sure your pay is at least at your industry’s and position’s average. You can check for this information using LinkedIn or Glassdoor.
How to approach this conversation with your boss? I will not be the best person to provide these advices but there are tons of more credible resources out there for you to research. Here’s one of my favorite articles on this topic from Harvard Business Review.
Unfortunately, asking for a raise doesn’t always work for various reasons and sometimes, you simply just can’t earn any higher because you reached your salary cap. If that’s the case for you, I recommend considering switching jobs or even your industry to land higher salaries. Yes, this may yield as a very inconvenient option for you but if you want to achieve your goal faster, this will be a necessary step. And who knows? You may discover another job that you like way better than the one you currently have.
7. CREATE OTHER SOURCES OF INCOME
If you speak to lots of business owners or recruiters trying to hire for entry-level paying positions, it’s quite tough to look for qualified candidates and to retain them right now. Why? Because they can make the same amount of salary doing something else since there are just so many ways to make money now.
With the boom of side hustles and ongoing development of on-demand economy, anyone can earn extra bucks if they are willing to put in couple of extra working hours per week. Here’s a few options:
- Become an on-demand driver for ridesharing or food-delivering companies: if you have a car, this can be an easy option for you since the barrier to enter is quite low. It’s suitable for folks that are currently between jobs or have a 9-5 jobs, which you can drive on the weekend of after work hours due to its flexibility.
- For the animal-lovers, pet-sitting is just great: pet owners love their pets. They really do and most of the times pets are like their kids. Sadly, they can’t be with their pets 24/7 due to other aspects of their lives. There’s definitely a demand for pet-sitting service. So if you have the passion and love for animal, you can either offer your services to people you know or go on a servicing platform to start taking on some gigs.
- Build a side business: If you are good at what you do such as Web-designing, Bookkeeping, or Software Development, freelancing is a great way to generate big amount of additional income. There will always be small business owners out there that cannot afford to hire a full-time employee performing those job functions but can pay you to either handle those projects or act as a consultant. And if you don’t want to perform a service and have a product to sell, starting an E-Commerce store, though yields great challenges, has lots of potential to earn even more than your current salaries. Of course, if you plan to start a business, do it with your own discretion simply because it’s not an option preferred by most people.
All items mentioning above are the most common based on what I observed recently but there are hundreds of other ways for you to earn additional income. Just need to do your own research and start!
8. REACH OUT FOR HELP
Yes, you read it right. Reaching out to family members for help is also an option for you to reach your saving goal faster and there should be no shame about that. In fact, there are services out there that actually help home buyers fundraise and manage their funds toward buying a home.
During the holidays or your birthdays or any other special occasions, if people ask what you want as gifts, do not be afraid to let them know your goals and what you look for in a gifts, which is either cash or gift cards that help you cover necessary expenses such as gift cards to grocery stores, gas, etc.
Even more direct than that, younger generations tend to get large lump sums amount of money as gift funds toward their down-payment. There is absolutely nothing wrong with that and it is quite a common practice actually. However, before you accept the money, definitely do some researches on that because most lenders will have some strict guidelines about this. Make sure you can speak to a Licensed Loan Officer before depositing the fund into your account to avoid all the hassles. Trust me on this!
In Conclusion
When it comes down to saving money, not only to purchase a house but also for other major items, unfortunately sacrifices will need to be made. It requires researching, planning, and self-disciplines.
All of the bullet points mentioned above work for me along with others I personally know. Some may work better for you and some may not. These are just some suggestions I want to share with readers because I do want everyone to be able to have a place called home. There will be a lot of temporary setbacks and short-term sacrifices but at the end of the day, you’re on the path to build wealth and stability for yourselves. I’m all for living life to the fullest but also a huge advocate for a healthy balance between fun and stability.
If you have other suggestions you want to share with the class, feel free to put in the suggestion box or put in the comment below.
Want to find out if you’re qualified for a mortgage?
Getting pre-qualified and getting the actual approval from the lender are two completely different things.
Getting pre-qualified or pre-approved by the lender isn’t necessarily guaranteeing that you’ll get the loan but it’s the most common way for them to go over your personal and financial background on the very surface and provide you with a rough estimate of your loan size. As long as all pieces of information you provided to your Loan Officer is as accurate as possible, the final approval should not be an issue.
This step, like I mentioned in my First-time Homebuyer Guidelines article, is indeed the most important step in the purchase journey because it’ll help you build such a strong case for your offering package. And guess what? It’s FREE of charge so make sure you get it done first. If you need help or recommendation, you can reach out to us by sending an email to mortgage@chadvorealestate.com
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