Your New Home Awaits: How to Save for a Down Payment

Crunch the Numbers

Creating a budget—and tracking your spending to ensure you stick to it—is an important first step to get a sense of where you stand. Roshni Chowdhry, innovation and product development lead at SafetyNet, says, “Understanding where you allocate your money will give you a realistic expectation of what you can afford.” Whether you use a pen and paper, Excel, or an online tool, tracking the inflow and outflow of money for at least a month is a good place to start.

Also, even before you reach out to a real estate agent, do your due diligence and utilize online tools, like mortgage calculators, so you are well-informed and ready to answer the slew of questions your agent will have for you.

Account for any additional costs, too. Michelle Waymire of financial advisory firm Young + Scrappy says, “When planning for a big purchase, be sure to include all the incidental costs associated with it. For example, saving for a house doesn’t just include a down payment; you also need to consider closing costs and an emergency fund to have on hand in case of home maintenance needs.”

Plan for Your Down Payment

According to Bank of America’s recently released Homebuyer Insights Report, almost one-third of first-time buyers believe they need 20 percent of a home’s price for a down payment. However, that’s not always the case.

Down payments can range between 5-20 percent, and according to Kathy Cummings, senior vice president of homeownership solutions at Bank of America, “There are affordable entry points to homeownership that require significantly less than 20 percent.” Keep in mind, however, that the lower the down payment, the higher your monthly mortgage payments will be. You may also have to pay mortgage insurance if your down payment is under 20 percent.

The Purchasing Power of a Pre-Qualification

Once you know how much money you have to play with each month, Tami Halton Pardee, a real estate broker and founder of Halton Pardee + Partners, recommends speaking to a mortgage broker—whom your real estate agent can introduce you to—to get pre-qualified for a mortgage. “Getting pre-qualified and having a realistic sense of what your spending ability is prior to beginning the house hunt leaves you much more mentally and emotionally prepared,” she says.

Also, if you’re pre-qualified and find a home you like, your offer will be taken much more seriously than someone who is not pre-qualified.

Keep an Eye on Your Credit

If you’re gearing up to buy a home, there’s one three-digit number that should be a top priority: your credit score. A high credit score will qualify you for the best loans at the best rates, saving you substantial interest over the life of your mortgage.

Beth Kobliner, a personal finance expert and bestselling author, says, “One of the best ways to build [your credit score] up is by paying your bills on time, every time—that means credit cards, utilities, and student loans. Automating these payments can make the process less painful. Plus, keep an eye on your utilization ratio. That’s the amount of credit you’ve used—on a credit card, say—compared to the amount of credit available to you.” Many experts agree that keeping your utilization under 30 percent will prevent it from hurting your overall credit score. that means credit cards, utilities, and student loans. Automating these payments can make the process less painful. Plus, keep an eye on your utilization ratio. That’s the amount of credit you’ve used—on a credit card, say—compared to the amount of credit available to you.” Many experts agree that keeping your utilization under 30 percent will prevent it from hurting your overall credit score.

Start Saving Now

As soon as possible, start socking money away for that down payment. A favorite saving tactic amongst many financial experts is to automate the process so you don’t have to think about it. Justin Lavelle, chief communications director of online background check platform BeenVerified.com, says, “Once you know how much you need, you want to start saving in a way that makes it routine. Auto withdrawal services are a good way to do this. Set up certain amounts that will automatically be deposited into a savings account for your future purpose.”

If buying a home will cost you more than what you are currently paying for housing, Lavelle suggests aiming to save that difference amount so you can get comfortable with a lower monthly outlay.
Also, try reducing expenses by consolidating any debt, and put what you save in interest into your down payment savings fund. Personal finance expert Andrea Woroch says, “If you’re carrying a revolving balance across your credit cards, for instance, tighten up your budget and save money by consolidating debt into one easy-to-manage personal loan with a low interest rate.”

Buying a house is no small accomplishment, and it takes time to do it right. By following the tips listed here, though, you’ll be on a path to homeownership before you know it.

This article originally appeared on Credit.com, but has since been updated.