Use these steps to prepare your finances, and in the process, discover whether homeownership is the right move for you.

24 minute read

Hey everyone. And thanks for joining me this week. My name is Laura Adams and I am a personal finance and small business expert, author, and educator. Who’s been hosting the money girl podcast since 2008. My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress.

Every show is created to give you actionable strategies, practical advice, and tips that you can use right away to take your financial life to the next level. If you’re not already subscribed to the show, be sure to do that. That’s how you’re going to automatically get each weekly episode also participate, and you can send me your money, questions, or comments. Leave a message. 24 seven on our voicemail line by calling (302) 364-0308. And you can also email me using my contactPage@lauradadams.com. And if you like reading the show, you know, sometimes I will give resources and tips and maybe you want to go back and take a look at those. You can always get those. They’re what we call the show notes. And it’s basically just a companion blog post for the show.

And they’re always published in the money girl section@quickanddirtytips.com. If you want to look for today’s episode number 674, called ready for homeownership, eight steps to prepare your finances. You probably know that buying a home is a major expensive decision. No matter if you’re a first-time homebuyer or you’ve been buying and selling real estate for decades, homeownership comes with financial upsides and risks. And for many people, it’s an emotional transaction as well. So how do you get fully prepared to buy a home? Well, I think getting ready should happen long before you start scrolling through online listings going to open houses, or working with a real estate agent. I know how tempting it is to kind of get sucked down the house rabbit hole and start looking for homes. It can be really fun to do, but that’s not necessarily the best place to start.

So this podcast is going to help you understand. Number one, if homeownership is even right for you, how much you can afford ways to save for a down payment and tips to get the most affordable mortgage possible. The more you know about the home buying process and prepare for it, the cheaper and the less stressful it’s going to be. So let’s dive into each step. Number one is what I mentioned, evaluate renting versus buying. So before you start obsessively searching for your dream home, the first step is to make sure that owning a home is the right move for you. There’s no financial that says you must buy a home. In some cases, you’re better off not becoming a homeowner. And I know that can be very counterintuitive for a lot of people who think the quote American dream, you know, unquote involves buying a home.

That’s not necessarily the case for everyone. So whether you should own or rent depends on various factors, including where you want to live. This is a big one. If you’re in a large city, renting can be much less expensive than buying a home. I’ve been in that situation in many cases where I’ve been in a big city, I’ve been at San Francisco and Austin where, you know, I didn’t think I would be there that long, which is also something to consider. And when I took a real hard look at buying, especially being in the area where I wanted to be in the city, a lot of times you moved to the city because you want to be close to all the things that are happening. You want to be downtown, or, you know, you want to be in kind of a hip area. And those areas can be very expensive to buy-in.

So looking at the cost to rent versus to buy in most cases, what I found is that renting was much less expensive. So, you know, you really do have to think about, you know, what is that comparison for you? What would a comparable home cost you? Uh, if you were to go ahead and purchase it. Now, if you’re in a smaller city, a smaller town, in most cases, I’d say that buying is probably going to be more cost-effective, but again, you really have to do your homework and take a look at what’s available, do some calling around to different relatives, real estate agencies, uh, different apartment communities, and, you know, find out what exactly they’re charging for a two-bedroom or three-bedroom. What are the amenities that you get with it? Okay. Also, you want to look at how long you plan to live somewhere.

As I mentioned in a lot of cases, when I was moving cross country for particular jobs, I knew that I would not likely be in that city for the rest of my life. You know, looking at it for maybe three to five years. And that is really about the point where it, you know, it may make sense. So I would say in general, it’s not wise to buy a home unless you’re confident that you will live in it for at least three years, maybe ideally, even five years, that will give you enough time to recuperate the buying costs, all the money that you spent on that home and enough time to also prepare to sell the property. So buying and selling property is expensive. So the longer you stay in a home, the less it ends up costing you, you also want to think about what lifestyle you enjoy.

For many people, being a homeowner allows them to enjoy hobbies that they really love like gardening or home remodeling, which they could not do as a renter. But renting may be more appealing to those who liked to do things like travel, you know, get away, leave the property, um, and you know, not be tied to it. Or maybe you just don’t want to be responsible for the upkeep and the ongoing maintenance of a home. All right. So that’s the first step is to really think about renting versus buying. Don’t assume that buying is, you know, 100% the answer for everyone. And what I’ve also found is that renting and buying maybe right at different seasons of your life, when you are maybe young raising a family, putting down some roots, buying can make a lot of sense, but as you maybe move around in your career and you know that you may not stay in one place very long, or maybe you just want to enjoy more of a freedom lifestyle where you can just kind of lock the doors and leave renting can make a lot more sense in that phase of your life.

Okay. Step number two is to check your credit. If you decide to explore ownership, the next step should be doing a deep dive into your credit reports and your credit scores. Staying on top of your credit is always important, but it is critical before buying a home because it is a primary factor that a mortgage lender is going to use to evaluate you. So you want to make sure you’re giving yourself enough time to repair your credit. If that is necessary, not only does repairing and building credit help you get approved for a mortgage, but it’s going to help you get a low-rate loan, which will save a massive amount of interest. Let me give you an example. Let’s say you’ve got excellent credit and you get a $200,000 fixed-rate mortgage. You’re going to pay about $145,000 just in interest over the life of a 30-year loan.

Now let’s compare that to a situation where you’ve got just average credit. You don’t have excellent credit. You’ve got average credit. In that case, you would pay close to $190,000 just in interest over the life of the loan. So you’re paying $45,000 more for the exact same loan, simply because you did not have great credit. Now your credit scores get calculated using the data in your credit reports. And that frequently changes as new information gets added and old data falls off. So you want to check your credit reports as early as possible and address any errors that could be incorrect account balances and correct payment dates like saying that you paid something past due when you really didn’t or even incorrect personal information. You want to get all that corrected quickly because it could take several weeks. It could even take a month or two.

So you don’t want to be doing that at the same time, you’re trying to apply for a mortgage. You can access your credit information directly from the national credit bureaus. They are Equifax, Experian and TransUnion, and there are also several really good free credit sites, such as annual credit report.com. That’s kind of like the official credit site that allows you to get your credit reports. It does not allow you to see your scores. However, there are other credit sites such as credit, karma, and credit Sesame. Those will allow you to see your credit reports and perhaps some of your credit scores. Those are really great resources. So I highly recommend signing up for those. Yes, they’re going to serve you ads and yes, they’re trying to promote credit cards and offers, but if you just use it to focus in on your credit information, they will be really useful for you.

All right. The third step is repair your credit. So let’s say you’re reviewing your credit reports and you find, Oh my gosh, I’ve got a black Mark on there that I didn’t even realize was on there. Maybe there is a late payment, or maybe you’ve got an account that just went into collections. You want to start making repair efforts at least six months to a year before applying for a mortgage. You can’t remove accurate negative information from your credit reports, but if you’ve got in accurate negative information, that’s what you want to work on. If you’ve got bad marks, they stay on your credit reports for seven years. Even if you pay off an overdue balance. So, you know, that’s the problem with making late payments is just going to stick around for a very long time.

However, the older that a delinquent account or a late payment gets the less, it hurts your credit scores before submitting a mortgage application, consider paying off any past due balances or negotiating settlements with your creditors. Getting caught up on any late payments will help clean up your report. Making you look less risky to a lender. As I mentioned, it’s not going to disappear. It’s still going to be there on your report, but the fact that you worked to clean it up, you worked to pay it off or make a settlement is going to work favorably for you. Now, one word of caution is that if you have old past due accounts, making a payment can restart the statute of limitations resulting in some legal risks. So if you’ve got a large amount of delinquent debt, I really would recommend consulting with an attorney or a financial advisor before you speak to your creditors or send them a payment. In some cases, it may be better just to let that statute of limitations run out, uh, and you know, make yourself less vulnerable to creditors. I did a podcast called the statute of limitations and four options for old debt, which is something you should check out. If you do have any past due debt, that will give you a lot more information about how to deal with old debts nicely today.

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Your debt to income or DTI or ratio before applying for a mortgage, figure your DTI and see what changes you may need to make. Mortgage lenders always evaluate a few debt to income ratios because they want to know how your expenses stack up against your income. So it’s a good indicator of how comfortably that you could take on additional debt. Most home lenders require that the payment on the mortgage you’re applying for add up to less than 30% of your income or thereabouts, and for all your debts added up, including that new mortgage payment that you’re looking at getting a typical acceptable ratio is probably, you know, in the range of percent. And you all may know that I created a handy DTI calculator that many of you have downloaded. This can make figuring out your ratio much easier. You can get my debt ratio calculator for free by sending me a text message, just text the phrase, my debt, M Y D E B T with no spaces, two three, three, four, four, four, and you’ll get it right away.

This free tool will prompt you to list out all your debts and your income, and automatically calculate your DTI and show you how your number stacks up. If you exceed a lender’s ratios, you may need to pay down some of your existing debt balances to make it all work out. But every lender has different underwriting guidelines and they may adjust those DTI ratios based on your financial situation. When you’re preparing to buy a home, you want to be sure to pay your bills on time, reduce as much debt as possible. Don’t get any other new debts or like don’t go buy a new car. Don’t take on any new credit accounts and avoid applying for new credit accounts, like a credit card, uh, as well avoiding all of those actions is going to help your credit and reduce your debt to income ratio. Step number five is calculate how much you can afford.

So the next step is to consider all the home buying costs you’re going to have to cover. You might want to check out a really great calculator over@bankrate.com called how much house can I afford. It allows you to input your monthly income and estimated home expenses. And in addition to a mortgage payment, there are some additional expenses to keep in mind. You know, I think a lot of people think, Oh wow, I can afford that mortgage payment. So that means I can afford the home. But the reality is there are a lot of kind of invisible expenses that you need to consider. So I’m going to go through some of them here. One of them is property taxes. These are the taxes that are owed to the local government, and they vary a lot depending on where you live. An average amount could be in the range of 3000 to 4,000 bucks per year, but it’s going to vary depending on the value of your home and where you live home insurance of course is required by mortgage lenders to protect the property from various disasters, such as fire windstorms and vandalism.

The price for insurance varies on a lot of different factors, including your home’s value, the location, the amenities, and an average premium could be in the range of 800 to 1500 per year. And again, this is just going to vary from state to state. You also may need to pay private mortgage insurance or PMI. This is another requirement when you pay less than a 20% down payment on a home, this insurance doesn’t you, it covers the lender, uh, in case you default on the home and don’t pay. So the premium depends on your home’s value, but it could be about 50 to 150 bucks a month added to your mortgage until you’ve got sufficient equity in the home for your lender to cancel that PMI, you might also have homeowners association fees or HOA fees. These could be required in certain neighborhoods or communities where you’ve got like a communal amenity, maybe a pool, a boat dock, or landscaping.

The cost could be 50 bucks a month, or much, much more, depending on, you know, the value of your property and home maintenance should always be expected. I would say a good rule of thumb is to save at least when 1% of your home’s value each year for upkeep. For example, let’s say you’ve got a $300,000 home. I would budget a minimum of $3,000 per year to pay for potential repairs. It could be your air conditioning system that just completely quits your heating system quits, or a water heater that you have to replace with a home. You never know what kind of maintenance may, may come up. So you gotta be prepared for that. All right, step number six, save a healthy down payment. If your goal is to buy a home, you’ve probably been thinking about how to save money for a down payment.

Well, to qualify for a mortgage, you must prove to a potential lender that you’ve got enough savings to fund your down payment lenders. Don’t finance a hundred percent of a home’s price. So that’s what the down payment is for. It’s the balance that you owe in addition to the proceeds from the mortgage. So the more you can pay down the less risky you are to a lender and the larger your down payment, the smaller your mortgage and your monthly payments are going to be while a down payment could be in the range of 5% to 20% of a home’s purchase price. You may have some additional upfront expenses that you’ve got to pay at the closing table. These may include a credit check, a home appraisal loan, underwriting fees, home inspections, mortgage discount points. These allow you to get a lower interest rate. You may have to pay for a property survey, title, insurance, or recording of the deed.

Again, these are on top of the down payment that the bank is going to want for their purposes. When you make a purchase offer on a home, one tip I can give you is to request that the seller pay some of your closing costs. You can also haggle with your mortgage lender, not to charge you specific upfront fees. Remember that in real estate just about everything is negotiable. So don’t be shy about asking for concessions and what people will kind of give and take. Uh, when we’re talking about these negotiations really does vary depending on where you live. There’s kind of like standard things that buyers pay for and sellers pay for in different parts of the country. So it’s just kind of a convention that it goes with your market, your real estate market. But I would say, you know, ask for it, ask for a concession.

If you really feel like you can get the seller to cover some of those for you. If you’re a first time home buyer, you’re a veteran, you’ve got low income, or you want to buy a property in a rural area. It is very possible to qualify for down payment assistance, through several different programs. And I’m going to put the links to those programs in the notes for the show. Again, they’re in the money girl section@quickanddirtytips.com and the benefits of down payment assistance programs vary depending on their rules and your circumstances. But the bottom line is that they will offer low or a no down payment purchase, making it much easier to become a homeowner. So again, it is possible to get a 100% financing, but you are going to have to qualify for a special program to get that. Now the money for your down payment can come from your savings, or it could come from gifts from your family.

And if you’re already a homeowner, your down payment can come from the money that you make. When you sell your current home. Here are some ways that you might think about to save your down payment more quickly. You could downsize your existing housing by moving into a less expensive place so that you can save money for your down payment fund. You can automate your savings by having a portion of your paycheck deposited into a dedicated savings account, or setting up a recurring monthly transfer. You might bundle services that you’re paying for. So try to think about things like utilities, your cable, internet, and wireless plans. How can you bundle some of those services to pay less? I always recommend shopping your insurance annually. And if it’s been a while, since you have compared rates for your auto or your renter’s insurance or your homeowners insurance, you want to do some shopping.

You may find that you can get a comparable policy and a lower price and save all the extra money you get. Maybe you’re going to get a raise or a bonus at work. You get a gift, maybe even a tax refund put all of that toward your down payment. And lastly, you might want to start a side hustle to create additional income that you can squirrel away for your new home. All right, step number seven is tap retirement accounts cautiously. So another way to come up with a down payment on a home is to tap a retirement account such as an IRA or a 401k while I don’t recommend this option, some provisions do allow it for a traditional IRA. You’re allowed to withdraw up to $10,000 a down payment. If you’re a first time home buyer, you must pay taxes on the withdrawal. But even if you’re younger than age, 59 and a half, which is the official retirement age, you won’t get hit with a 10% early withdrawal penalty.

So again, you get to avoid the penalty, but you do have to pay taxes on the withdrawal. Now, if you’ve got a Roth IRA, you can withdraw your original contributions without owing any taxes or any penalties, no matter your age. However, if you tap the earnings portion of the account before age 59 and a half taxes, and the early withdrawal penalty would apply that’s because you have not paid taxes on the earnings portion of the account. You do pay taxes upfront on your contribution. So that’s why you get to take them out as you like.

If you have a workplace 401k or a four Oh three B, they typically allow hardship withdrawals, which do include buying or repairing a primary home. However, making a distribution means you do have to pay taxes and an early withdrawal penalty. If you’re younger than age, 59 and a half plus after you take a hardship withdrawal, you may get restricted from making additional contributions to your retirement account. For six months, some plans implement a kind of like a freeze on your account. If you do make a hardship withdrawal. So find out if that is something that would apply some workplace retirement accounts allow loans. You may be permitted to borrow half of your vested balance up to $50,000 maximum. Now you have to repay that with interest back to your own account within five years, however, the term may be longer for a home purchase. So in some instances, you know, it could be 10 years, 15 years. You want to find out what that repayment term is. If you repay a loan on time, you do not have to pay income tax or a penalty on the borrowed.

Taking a loan from a retirement plan at work might sound like a good idea. I do want to make sure you understand that one of the biggest problems with doing that is if you don’t repay it on time, the outstanding balance becomes an early withdrawal. That means you do have to pay income tax plus an additional 10% penalty. If you’re younger than age, 59 and a half. And if you leave your job or you get fired. In most cases, you’ve got to come up with the entire outstanding loan balance within a very short period, such as 60 days. So be sure to read your retirement plan document, or ask your benefit administrator for all the details on taking a loan before signing up. If that’s something you’re considering to use that money to buy it.

To sum up, if you need to tap a retirement account to buy a home, taking a withdrawal from your Roth, IRA is the best possible option. However, in general, I don’t recommend draining a retirement account for any reason, even buying a home problem is it just comes with too many downsides, including not being allowed to make contributions for a period missing out on employer, matching, being left with a depleted retirement account and giving up the opportunity to build wealth.

While taking a loan or withdrawal from a retirement account may make sense for some home buyers. The best scenario is to have plenty of savings. So you don’t need to touch your retirement nest egg in the first place, always speak with a financial advisor to carefully weigh the pros and cons of dipping into your retirement account for any reason.

All right, the last step, number eight, get a mortgage pre-approval. So once you’ve reviewed your credit, you’ve calculated how much you can afford. And you’ve got plenty of down payment. It’s time to get pre-approved for a mortgage. And you might apply with several potential lenders and compare quotes in a pre-approval a lender checks your credit, verifies your income and approves various documentation that they ask you for. They will offer a maximum loan amount and an interest rate for a period such as 30 or 60 days while you go out and find the home that you want. Now remember that just because you qualify or pre qualify for a mortgage doesn’t mean that you should take out the maximum amount. I know it might be tempting to do that, but it’s a really big commitment. That’s got to fit in with all of your overall financial goals. For some people spending the full amount might be a wise decision. However, if a mortgage would leave you, what I call house poor with an exceptionally tight budget, please consider spending less on a home or delaying your home purchase until you’ve saved up a larger down payment. I hope this

Has been helpful as you prepare and think about becoming a homeowner. If you’d like to get my short email that I send out every week, that’s filled with tips and tools that I think you’ll enjoy for saving more growing your money and becoming an amazing money manager. You want to visit Laura D adams.com and you can sign up there or text, get updates. That’s G E T U P D a T E S. Get updates with no space to the number three, three, four, four, four, and you’ll be on my list. And if you’re not into email, another great way to stay in touch is to join my private Facebook group called dominate your dollars. You can search for it on Facebook or text dollars, D O L L A R S to that same number three, three, four, four, four, that’s all for now. I’ll talk to you next week until then here’s to living our richer life.

Money girl is produced by the Audio Wizard, Steve Ricky Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, take a moment to rate and review it on Apple Podcasts. New episodes are released every Wednesday and when you’re subscribed, you’re going to get them for free automatically. You might also like the backlist episodes and the show notes that are always available@quickanddirtytips.com.

 

Buying a home is a huge, expensive decision, no matter if you’re a first-time homebuyer or have been buying and selling real estate for decades. Homeownership comes with financial upsides and risks, and for many people, it’s an emotional transaction as well.

So how do you get fully prepared to buy a home? Getting ready should begin long before you start scrolling through online listings, going to open houses, or working with a real estate agent.

Today, I’ll help you understand if homeownership is right for you, how much you can afford, ways to save for a down payment, and tips to get the most affordable mortgage possible. The more you know about the home buying process and prepare for it, the cheaper and less stressful it will be.

Here’s more about each step you can use to prepare your finances to buy a home.

1. Evaluate renting versus buying

Before you start obsessively searching for your dream home, the first step is to make sure owning a home is the right move for you. There’s no financial rule that says you must buy a home. In some cases, you’re better off not becoming a homeowner.

Whether you should own or rent depends on various factors, including:

  • Where you want to live. If you’re in a large city, renting can be much less expensive than buying a home.
  • How long you plan to live somewhere. In general, it’s not wise to buy a home unless you’re confident you will live in it for at least three years. That gives you enough time to recuperate your buying costs and prepare to sell the property.
  • What lifestyle you enjoy. For many people, being a homeowner allows them to enjoy hobbies, such as gardening or home remodeling, which they couldn’t do as a renter. But renting may be more appealing to those who travel frequently or don’t want to be responsible for the upkeep and ongoing maintenance of a home.

2. Check your credit

If you decide to explore homeownership, the next step should be doing a deep dive into your credit reports and scores. Staying on top of your credit is always important, but it’s critical before buying a home because it’s a primary factor that mortgage lenders use to evaluate you.

Not only does repairing and building credit help you get approved for a mortgage, but it’s a critical way to qualify for a low-rate loan, which saves a massive amount of interest.

For example, if you have excellent credit and get a $200,000 fixed-rate mortgage, you pay about $145,000 just in interest over the life of a 30-year loan. But if you have average credit, you’ll pay close to $190,000 in interest, or $45,000 more, for the same loan!

Your credit scores get calculated using data in your credit reports, which frequently changes as new information gets added and old data falls off. Check your credit reports and get any errors, such as incorrect account balances, payment dates, or personal information, corrected as quickly as possible.

You can access your information directly from the national credit bureaus: Equifax, Experian, and TransUnion. There are also many free credit sites, such as AnnualCreditReport.comCredit Karma, and Credit Sesame.

3. Repair your credit

If you have black marks on your credit, such as late payments or accounts in collections, start making repair efforts at least six months to a year before applying for a mortgage. You can’t remove accurate negative information, which stays on your credit reports for seven years, even if you pay off an overdue balance. However, the older a delinquent account gets, the less it hurts your credit scores.

Before submitting a mortgage application, consider paying off any past due balances or negotiating settlements with creditors. Getting caught up on late payments helps clean up your report, making you look less risky to a lender.

4. Check your debt-to-income (DTI) ratio

Before applying for a mortgage, figure your DTI and see what changes you may need to make. Mortgage lenders evaluate a few debt-to-income ratios to know how your expenses stack up against your income. It’s a good indicator of how comfortably you could take on additional debt.

Most home lenders require the payment on the mortgage you’re applying for to add up to less than 30% of your income. And for all your debts, including the new mortgage, a typical acceptable ratio is no more than 40%. If you exceed these lending limits, you may need to pay down debt balances. But every lender has different underwriting guidelines, and they may adjust DTI ratios based on your financial situation.

When you’re preparing to buy a home, be sure to pay your bills on time, reduce your debt as much as possible, and avoid applying for new credit accounts, such as a credit card or auto loan. Those actions boost your credit and help lower your DTI.

5. Calculate how much you can afford.

The next step is to consider all the home-buying costs you’ll have to cover. Check out Bankrate’s How Much House Can I Afford? Calculator, which allows you to input your monthly income and estimated home expenses.

In addition to a mortgage payment, here are some additional expenses to keep in mind:

  • Property taxes are owed to the local government and vary depending on where you live. An average amount could be in the range of $3,000 to $4,000 per year.
  • Home insurance is required by mortgage lenders to protect the property from various disasters, such as fire, windstorms, and vandalism. The price depends on many factors, including the home’s value, location, and amenities. An average premium could be in the range of $800 to $1,500 per year.
  • Private mortgage insurance (PMI) is another requirement when you pay less than a 20% down payment. The premium depends on your home’s value but could add a range of $50 to $150 to your monthly mortgage payment until you have sufficient equity for your lender to cancel it.
  • Homeowner association (HOA) fees may be required in some neighborhoods or communities to pay for communal amenities such as a pool, boat dock, or landscaping. The cost could be $50 per month or much more.
  • Home maintenance should always be expected. A good rule of thumb is to save at least 1% of your home’s value each year for upkeep. For example, if you have a $300,000 home, budget $3,000 per year to pay for potential repairs such as an HVAC system or a water heater that quits working.

6. Save a healthy down payment

If your goal is to buy a home, you’ve probably been thinking about how to save money for a down payment. To qualify for a mortgage, you must prove to a potential lender that you have enough savings to fund a down payment.

Since lenders don’t finance 100% of a home’s price, the down payment affects the balance you owe, in addition to the proceeds from a mortgage. The more you can pay, the less risky you are to a lender. And the larger your down payment, the smaller your mortgage and monthly payments will be.

While a down payment could be in the range of 5% to 20% of a home’s purchase price, you may have additional upfront expenses to pay at the closing table, including:

  • Credit check
  • Loan origination or underwriting fee
  • Appraisal
  • Home inspections
  • Mortgage discount points (which allow you to get a lower interest rate)
  • Property survey
  • Title insurance
  • Deed recording

When you make a purchase offer on a home, one tip is to request that the seller pay some of your closing costs. You can also haggle with your mortgage lender not to charge specific upfront fees. In real estate, just about everything is negotiable, so don’t be shy about asking for concessions.

If you’re a first-time homebuyer, a veteran, have a low income, or want to buy property in a rural area, it’s possible to qualify for down payment assistance through these programs:

The benefits of down payment assistance programs vary depending on their rules and your circumstances, but they offer low or no down payment, making it much easier to become a homeowner.

The money for a down payment can come from your savings or gifts from your family. And if you’re already a homeowner, your down payment can come from the money you make when you sell your current home.

Here are some ways to save a down payment quickly:

  • Downsize your housing by moving into a less expensive place so you can save money for your down payment fund.
  • Automate your savings by having a portion of your paycheck deposited into a dedicated savings account or setting up a recurring monthly transfer.
  • Bundle services to pay less for utilities such as cable, internet, and wireless plans.
  • Shop your insurance if it’s been a while since you compared prices for auto or renters insurance.
  • Save all extra money such as raises or bonuses at work, gifts, and tax refunds.
  • Start a side hustle to create additional income to squirrel away for a new home.

7. Tap retirement accounts cautiously

Another way to come up with a down payment on a home is to tap a retirement account, such as IRA or 401(k). While I don’t recommend this option, some provisions allow it.

For a traditional IRA, you’re allowed to withdraw up to $10,000 for a down payment if you’re a first-time homebuyer. You must pay taxes on the withdrawal—but even if you’re younger than 59½, you won’t get hit with the 10% early withdrawal penalty.

If you have a Roth IRA, you can withdraw your original contributions without owing taxes or a penalty, no matter your age. However, tapping the earnings portion of the account before age 59½ means that taxes and the early withdrawal penalty would apply.

If you have a workplace 401(k) or 403(b), they typically allow “hardship” withdrawals, which include buying or repairing a primary home. However, making a distribution means paying income taxes and a withdrawal penalty if you’re younger than 59½. Plus, you may get restricted from making contributions to your retirement account for six months.

Some workplace retirement accounts allow loans. You may be permitted to borrow half of your vested balance, up to $50,000. You must repay it with interest to your account within five years. However, the term may be longer for a home purchase. If you repay a loan on time, you don’t have to pay income tax or a penalty on the borrowed funds.

One of the biggest problems with taking a loan from your 401(k) or 403(b) is that if you don’t repay it on time, the outstanding balance becomes an early withdrawal. That means you must pay income tax plus an additional 10% penalty if you’re younger than age 59½.

If you leave your job or get fired, you’ll probably have to come up with the entire outstanding loan amount within a short period, such as 60 days. So be sure to read your retirement plan document or ask your benefits administrator for all the details on taking a loan before signing up.

To sum up, if you need to tap a retirement account to buy a home, taking a modest withdrawal from your Roth IRA is the best possible option. However, in general, I don’t recommend draining a retirement account for any reason. It comes with too many downsides, including not being allowed to make new contributions for a period, missing employer matching, being left with a depleted retirement account, giving up the opportunity to build wealth.

While taking a loan or withdrawal from a retirement account may make sense for some home buyers, the best scenario is to have plenty of savings, so you don’t need to touch your retirement nest egg in the first place. Always speak with a financial adviser to carefully weigh the pros and cons of dipping into your retirement account for any reason.

8. Get a mortgage preapproval

Once you’ve reviewed your credit, calculated how much you can afford, and have enough of a down payment, it’s time to get pre-approved for a mortgage. You might apply with several potential lenders and compare quotes.

In a preapproval, a lender checks your credit, verifies your income, and approves various documentation. They offer a maximum loan amount and interest rate for a period, such as 30 or 60 days, while you find potential homes.

This article originally appeared on Quick and Dirty Tips.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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