Steps to saving for a down payment - Tri-State News, Weather & Sports

By Andrew Housser

As the holidays approach, you may be thinking that you would like to celebrate next year's festivities in a home of your own. But first you need to save for a down payment, a task that is becoming increasingly challenging as the housing market recovers.

The cost of buying a home has increased 12 percent over the past year. According to the National Association of Realtors, the median price for a single-family home is now $203,500. A minimum 5 percent down payment on a conventional loan for this amount will set you back $10,175. Of course, home prices are even higher in many cities and metropolitan areas. Mortgage rates also are on the rise after hitting near-record lows of 3.35 percent in May.

It can be challenging to save money for a home when you are juggling other expenses like rent, car payments and even credit card debt. These tips can help you achieve your dream of home ownership.

Open a dedicated savings account. It is easier to track your progress when you keep your down payment savings account separate from other funds. (You also will be less tempted to dip into those funds.) To make it easier to save, automatically deposit a set amount into the account with every paycheck. As your savings grow, you might want to transfer the funds into a money market savings account or a certificate of deposit (CD). These enable you to earn a much better interest rate. Just make sure that the terms fit your timeframe. Some of these accounts penalize early withdrawals.

Explore your loan options. Most conventional mortgages require a down payment of 20 percent of the home's purchase price. However, Federal Housing Administration (FHA) loans sometimes require only a 3.5 percent down payment. The government backs these loans, which include most closing costs and fees. Because the FHA insures the mortgage, lenders often are more willing to adjust terms to make loan qualifications possible. If you have a history of credit problems such as a bankruptcy or foreclosure, an FHA loan may be worth looking into. To see if you qualify for this type of loan, go to an FHA-approved lender or broker. Find a lender in your area via the U.S. Department of Housing and Urban Development.

Borrow from retirement. It is rarely a good idea to take money out of retirement funds because of the negative effect on your retirement plans. You also will owe early withdrawal penalty fees and taxes. However, first-time homebuyers are allowed to withdraw up to $10,000 from individual retirement accounts (IRA) without penalty. If you have a 401(k) account, you can borrow up to half of your vested account balance, but no more than $50,000. Some 401(k) plans allow hardship distributions. To access funds this way, you must prove that your 401(k) funds are the only way you will be able to put a down payment on a home. When you borrow from a 401(k), you must repay the funds, with interest, within five years.

Stretch your budget. Review your budget every month to see where you can trim and save. Keeping the down payment in mind as your priority, cut back on nonessential expenses like dining out, concerts and vacations. Try to negotiate lower rates on things like car insurance and your smartphone plan. Consider moving into a smaller apartment that charges less rent. Take a look at your debt load. You may be able to get a different repayment plan for your student loan. You can consolidate and transfer credit card debt to a card that charges lower interest. You can even shift your car loan to a lender that offers better rates.

For already-stretched budgets, it is not easy to find money for a down payment. Stay confident by remaining realistic about your goals and the timeframe it will take you to reach them. And during the time you are saving for your down payment, pay attention to improving your credit score. A stronger credit score will help you secure a better interest rate when you are ready to buy that house.

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.