Saving enough money for a home down payment is a challenge for every generation, but millennials face extra hurdles. The good news? With determination, discipline and a plan, you can do it. Let’s make it happen.
Millennials face unique challenges
Career prospects for many millennials were handicapped by the great recession of 2008. Many millennials carry a lot of college loan debt. And home prices have risen dramatically over the two generations since the 1960s as inflation and population growth have created a steady housing demand. But the job market for millennials has greatly improved, and the tremendous increases in housing prices seen earlier this decade have slowed, giving more Americans, including millennials, the opportunity to get into a home.
A commitment to saving
To save enough for a home down payment, make a commitment to do it. Set a goal for how much you want to save each month and discipline your spending so that you can meet it. To accomplish this, be mindful of how you spend your money each day. It is easy for all of us to slip into a nonchalant mindset of buying what we want without giving it much thought. Become intentional and thoughtful in how you spend and you’ll become aware of the difference between wants and needs. Record and track every expense to see exactly where you stand month to month. The many digital budgeting tools available can make this as easy as possible.
Budget and savings ideas
In addition to reining in your spending, look for other ways to save for your home down payment. Explain your savings goal to your parents and live at home with them longer than you may have planned. If you rent a house or apartment, get a roommate. Avoid expenses like cable television, full-price retail clothes, lattes at the coffee bistro and movies in theaters.
Segregate your savings for your first home down payment from the rest of your accounts. Put money into your down payment account every month, and make it untouchable short of a real emergency.
Check with your employer’s benefits administrator to see if they offer a payroll savings plan. If so, take advantage of it to simplify the task of saving for a home down payment. Generally, these plans automatically deposit a set amount of each paycheck into an interest-bearing savings account. Keep in mind that payroll savings plans are different from retirement savings plans such as 401ks, which are also important.
There are also several good apps that can help you automate the management of expenses and savings.
Plan on 20 percent home down payment
If you’ve saved a 20 percent home down payment, lenders consider you a safer risk than those who put less into the deal and charge you less in interest than they do those with lower or no down payments. Paying less than 20 percent down on a conventional mortgage loan also means you will be forced to pay monthly for private mortgage insurance (PMI) to protect the lender from default. These monthly PMI premium payments represent money that could go toward paying off the principle balance on your mortgage.
Home down payment assistance
Consider the Federal Housing Administration (FHA) or Veterans Affairs (VA) programs for help with a down payment. FHA program eligibility is based on yearly income and a minimum credit score. Down payment grants range from 3.5 percent to 5 percent of the purchase price, usually forgiven after owning the home for a specific number of years. Programs and eligibility requirements vary, depending on where you live.
Plan and price where you want to buy
As you’re saving, visit areas of town where you want to live. Shop around so that you know the home values, at least in today’s prices, and what it will take to save up that 20 percent home down payment.
Be steely-eyed about what you can afford
One thing that sabotages home buying is falling in love with a house you cannot afford. Determine how much home you can afford and stick to it. Don’t get swept away by a house that blows your budget.