You might still be some years away from wanting to become a homeowner, but if you ever want to make that dream a reality, it’s important to start saving in advance.

Having enough to cover the 20% down payment will make a huge difference to your buying options. You’ll be able to secure a better interest rate than you would if you put down less. Furthermore, your offer will be much more appealing than those who can’t make it to 20%.

A 20% down payment will be a large amount of money, and unless you have a good strategy to reach your target number, homeownership will only remain a dream. Below is a simple 4-step strategy you can use to reach your goals and make your dreams reality.

Step 1: Calculate how much you’ll need to save

Like any savings plan, you’ll need to know what your target is before you can start.

Schedule a meeting with your mortgage lender to determine how much of a mortgage you can qualify for. The standard rule is that your housing expenses should not exceed 28% of your monthly income.

To take an example, if your monthly income is $5,000, you can start putting aside $1,400 a month (5000 x .28) to pay your monthly expenses. This will include the mortgage principal, interest, property taxes, homeowner’s insurance, and any other monthly expenses. With a current average interest rate of about 4.5%, that’s about $177,500.

To find out how much house you can afford, you’ll need to add the down payment to the number calculated above. The standard, and advised, down payment amount is 20%. You can certainly pay a lot less than this, but you’ll be required to take out Private Mortgage Insurance (PMI).

PMI is an insurance policy which ensures that in the event of a default the insurance bails you out and pays the lender. If that happens, your credit will be ruined, and you’ll face the consequences of default. As such, it makes sense to try everything to save that 20%. Taking the above example, you can calculate your needed amount this way:

$177,500/.80 = $221,875 – $177,500 = $44,375 (rounded up as $45,000)

Your mortgage lender will do calculations based on your financial situation, but this will give you an idea of how the calculations are done.

Step 2: Determine your timeframe

How soon do you plan on buying a home? If you hope to become a homeowner within three years, you’ll need to save $15,000 a year. Obviously, the shorter or longer your timeframe, the lower or higher your annual savings target will be.

Step 3: Set up an automatic savings account

Make things easier for yourself by setting up a separate savings account that you can dub your ‘home fund.’ Set it up so that it automatically allocates a percentage of your monthly pay to the account.

If you want to get serious about saving, put your money into a Certificate of Deposit account. This will mean not being able to withdraw the money for a set time without paying a hefty fee. The interest rates also tend to be much higher on these accounts.

Step 4: Find ways to start saving

Since you’ll need to save thousands of dollars every year, you’ll need to start reevaluating your budget to see if your savings goal is reachable. This will mean cutting back expenses and finding ways to earn additional income. Here are some of the best ways to do that:

  • Pay off your credit cards – There’s no point trying to start saving if you have debts that are racking up interest. Make it a priority to pay down your credit card debt. Get rid of the ones with the highest interest rate before moving on to the next. Clearing your debts will not only reduce your expenses but also boost your credit score which will increase how much you can qualify for on your mortgage.
  • Cut your bills – Look through your monthly bills and look for ones that you can cut or eliminate entirely. This money can then be put into your savings account. You can use a service like Trim to monitor your spending and find subscriptions you can cancel.
  • Start a side hustle – Do you have a skill you could monetize? If you can’t take on a second job then look for ways you can earn money on the side by using a skill you already have. Event photography, freelance writing, and selling handmade crafts are just some of the side hustles you can start right now.
  • Sell unwanted items – You’ve probably got a few things around the house you no longer need and can get a good price for on eBay or Craigslist. Go through your entire home see what you can find.
  • Save your raises, bonus and tax returns – It’s tempting to treat yourself when you get a sudden windfall of money. Instead, you should be putting that into your savings account to move faster toward your target.

Start Saving for Your Dream Home

There will still be expenses to pay once you get the home, so use this as a testing period to get yourself ready for homeownership. You’ll need a lot of discipline and hard work if you’re going to save the hefty amount needed for a down payment.

But with the right planning and preparation, you can make the road ahead much easier.  A NAEBA buyer agent can help determine a realistic timeframe and budget for you and your family and will work with you to achieve your exciting goal of home ownership!

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