When buying a house, offering a larger down payment can save you a lot of money later down the line. Here are some tips and tricks to save for a down payment the smart way.

Saving for a down payment is not as simple or straightforward as saving money you might have lying around the house.

A lot of people find themselves wondering how they can save more towards their first home, but there's really only one way that will work - putting aside smaller amounts every month and investing them into the stock market.

In these seven steps, we’ll cover how to begin saving money for the biggest purchase you’ll likely ever make, and how to do it in the smartest way possible.

Step 1: Figure out how much you’ll need to save

Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for.

Generally speaking, your housing expenses should not exceed 28 percent of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment.

The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues if any.

With mortgage rates at about 4.5 percent, this will translate into a mortgage loan amount of about $177,500.

In today's tight lending market, you should generally expect to make a 20% down payment on top of your offer price. This is not required – it just ensures that the deal will be affordable for everyone.

You can always put down less, but you will likely be paying a higher rate.

So taking our example of a mortgage for $177,500, and making a provision for a 20 percent down payment, we can calculate the actual dollar amount this way:

$177,500 divided by .80 = $221,875, subtract the $177,500 mortgage loan = $44,375, or rounded up to $45,000

If rounding the numbers up, you’ll be purchasing a house for $222,000, with a $177,500 mortgage, and a down payment of about $45,000.

Don’t let the calculations get you down—a mortgage lender can do this same analysis for your own financial circumstances. We've done it just to illustrate, and so that $45,000 number will continue on in our next set of calculation examples!

Step 2: Determine your timeframe

The next step is to determine your timeframe. If you plan on purchasing a home in five years, you’ll have to be prepared to save $9,000 per year to cover the down payment.

Naturally, the shorter your timeframe is, the higher your annual savings goal will be.

Step 3: Find the best way to save for your down payment

The best way to save for a down payment on your house is not by investing in risky investments like stocks or real estate trusts. The funds should be kept safe and secure with an established institution, such as boring old savings accounts or certificates of deposit that offer 2% interest rates per year.

Sure, you may be able to earn more money by investing your down payment account in higher-risk vehicles, but we wouldn't want you to risk losing that money.

The worst-case scenario would not be missing out on returns, it's losing some money you need to buy your home.

Step 4: Make room in your budget

Making room in your budget may seem like an admission that something has to give, but saving money and preparing for homeownership is worth it.

You won't be able to get into the house without making some changes; cutting back on expenses will help you save more than if you just lived within what was already there (and could do without). Finally, If nothing else works out well enough then keep chipping away at those old budgets until they're gone!

Step 5: Set up an automated savings plan

To get started saving for a down payment, you’ll need some sort of payroll savings plan. The simplest way is by allocating regular pay into an account that's dedicated to accumulating funds toward your dream home purchase.

When you put money into a savings account, it disappears from your paycheck. You can't spend that extra cash on anything else and the temptation disappears.

Step 6: Bank those windfalls

You can make the process of saving money for a down payment on a house easier by banking periodic windfalls. These can include income-tax refunds, gifts received, bonuses or large commission checks, or even the sale of personal assets.

Depositing money into an account to buy a future home can seem like magic. But by putting some of your monthly earnings away each year, you are actually accelerating the process and saving years off buying property!

Step 7: Build flexibility into your savings plan

Whatever the size of your down payment, it is important to build flexibility into your savings plan.

While you’re saving up money, there’ll be other demands on your finances. These can include major car repairs, medical emergencies, expenses, or even the temporary loss of a job. Your life does not stop just because you have a goal of saving money for a down payment on a house. You’ll have to be ready when these life events happen.

Don't forget to have an emergency fund before saving for your down payment and keep it well stocked. If you know that certain expenses will be coming up, such as replacing cars or other major items in life then prepare financially accordingly.

Summary

Buying a home can be a long process that requires a solid amount of your savings, but think of it all as preparation for homeownership. You’ll have all of those expenses after you buy your home too. So think of this as a practice run to help prepare both your finances and your mentality for the extra expenses that homeownership brings.

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