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How to Budget for a Down Payment


If you’re thinking about buying a home, especially if it’s your first home, you’ll need to think about saving for a down payment. Whether or not you’ll need a down payment depends on the type of mortgage you get and many other factors.

Rest assured, you can turn to AAFMAA Mortgage Services LLC’s (AMS) Military Mortgage Advisors (or MMAs for short) for help at every step, from determining how much home you can afford, how much (if any) you’ll need to put down, and your homebuying time frame. (Plus, you can download our free homebuying guide to use any time).

Our best advice? Start planning for homeownership early by evaluating how your income and savings will change over time, and what additional expenses you may incur when becoming a homeowner. Why? If you plan to save thousands of dollars for a down payment or other expenses, you may need to earn additional income, cut back on expenses, or both.

Related: Budgeting 101 in the Military

Here Are a Few Tips to Get You Started.

1. Know How Much You’ll Need for a Down Payment

The amount you put down will depend on the type of mortgage you get. A conventional mortgage, for instance, typically requires you to pay at least 3-5% down. So, if you purchase a home for $350,000, your down payment would be between $10,500 and $17,500. However, with conventional mortgages (backed by Fannie Mae or Freddie Mac) private mortgage insurance (PMI) is required when the down payment is less than 20% of the home’s value, which means you will pay an extra amount as part of your monthly payment.

There are also some types of home loans — such as VA Home Loans backed by the government — that will allow you to purchase a home with up to no money down. But to secure a better interest rate and start building equity right away, you might want to put some down — say 10% or even 20%. While VA Loans do not require a down payment, there are some financial benefits to making one if you’re purchasing your home, including the opportunity to pay a lower VA funding fee and more affordable monthly mortgage payments.

While a VA Loan does not require a down payment, or require private mortgage insurance (PMI) if your equity is less than 20%, VA Loans have a funding fee based on the total amount of your loan, and is expressed as a percentage of your total loan amount. (See VA’s funding fee charts for clarification.)

Your MMA can help you determine which loan type is best for you and how much you may want to put down. Setting that money aside will take some willpower and a budget.

2. Set Savings Goals and a Timeline

A budget doesn't have to be complicated, time-consuming, or costly. It’s simply a tool that helps you track your income and expenses so you can make better financial decisions. Second, no special equipment is required. You can write out your budget, use a software program, or use a mobile app designed for personal finance. Budgeting software and apps typically link to your bank accounts and credit cards to automatically track purchases. Some can categorize your spending into different buckets, such as transportation, food, etc.

If you want to save $10,000 in one year, that would mean putting away about $800 a month. If that’s not doable for you, consider lengthening your savings time to two or even three years. Before commiting, make sure you’ve also considered saving enough for household maintenance and repairs (estimate 1-2% of the purchase price per year for this), an emergency fund to cover living expenses for six to 12 months, and “other” unexpected costs like a major car repair or uncovered medical expenses. (AAFMAA’s Wealth Management experts can help with this overall planning.)

You can also shorten the timeline needed by banking “windfalls,” such as income-tax refunds, gifts received, bonuses or large commission checks, or even the sale of personal assets. By depositing those funds into your savings accounts, you fast-forward the process of saving for your future home and other expense buckets.

Hint: You can make saving a little less painless if you set up automatic withdrawals from each paycheck or pension payment you receive for designated savings or money market accounts. When money moves directly from your checks to your dedicated savings accounts, it takes some of the sting away and removes the temptation and ability to spend the money on something else.

3. Reward Yourself and Make Proactive Adjustments

Budgeting for a down payment or anything else doesn’t sound fun, right? So it’s important to share the plan with your family so they understand and learn from the process and build in some incentives to keep you going. This could be splurge on things like a massage or new outfit, or doing things that are free with friends and family like planning a day at the park or local arts district. Taking a little time to acknowledge how far you’ve come is important so you understand the bigger picture and can track how far you’ve come.

It’s also important to take an honest look at your budget and make tweaks if needed. Could you be putting more into savings? Or is your current plan too burdensome? A budget should be flexible and change along with changes in your income and other factors.

Saving to buy a home can be a lengthy process that requires a bit of planning and sacrifice, but think of it all as preparation for homeownership. You’ll have all of those expenses after you buy your home, too, but you’ll also have large expenses related to the home itself.

So think of this goal-setting as a dry run to prepare both your mind and checkbook for the extra expenses that homeownership will bring.

Related: How Much Does It Truly Cost to Maintain a Home?

We’re Here to Help

Whether you’re just thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs.

Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!

This article was originally published February 26, 2021.