The first financial challenge when you're thinking about buying a home is how to come up with the down payment. These days, it's rare to get a mortgage without contributing some of your own cash. And if you're trying to buy a home that was foreclosed or through a short sale -- where the purchase price is below the amount owed on the house -- a larger down payment can speed up the process. A low credit score, however, may drive up the size of the required down payment.
Here are some tips to save up your down payment.
1. Decide how much house you can afford.
The first step is to set your savings goal. Research home prices and determine how much you can afford. Calculators can be found on most bank websites and on the FHA site at www.fha.gov.
The median price of existing homes in the U.S. is $165,100, according to the National Association of Realtors. A 5 percent down payment for a home that price would be $8,255. A 20 percent down payment would be $33,020. If you're able to save 20 percent, lenders will not require you to purchase Private Mortgage Insurance, which will reduce your monthly expenses.
2. Set up a savings plan.
You'll also need to create a savings plan and set a deadline for reaching your goal. One method is to find the difference between your current housing costs and your projected monthly mortgage payment, and put that much away each month.
This system has the advantage of allowing you to decide if you really earn enough to afford the home you want. 'In some cases, if a homeowner is paying a low rent, doubling that payment can be quite a shock.
Open a separate savings account for your down payment to minimize the temptation to tap the money for other needs. Also setting up automatic transfers to your new account will lessen the chance you'll spend the money elsewhere.
3. Pare back expenses and raise cash.
Review your spending habits and determine where you can find extra cash. If you're determined to buy a house as soon as possible, try tightening your budget. Start by putting away the credit cards. Then cut out cable TV, switch to a less expensive cell phone plan and reexamine other aspects of your spending until you've pared back to just necessities. Use coupons at the grocery store and stay away from the mall. Hold a garage sale or sell unused items online. There are dozens of books and blogs you can turn to for frugal living advice that can help accelerate your savings.
4. You may qualify for assistance.
If you're hoping to take advantage of the down market but haven't got that much saved, you may be able to find help through various programs.
There are FHA-backed programs in every state. Most are aimed at low- and moderate-income, first-time homebuyers and usually require recipients to make some contribution. Visit the agency's website at www.fha.gov to learn if you qualify for a program in your area.
The Veterans Administration and the Agriculture Department are among other government agencies that offer down payment assistance.