Buying your first home is exciting but also a little bit intimidating. Drafting a plan by understanding what is expected will be key to your success.
First, let’s look at what your money will be going toward in the home buying process.
One thing that causes people some hesitation is coming up with a down payment. They ask questions like, “Is a down payment always required? and How much will I be expected to put down?”
What Is a Down Payment?
A down payment is an up-front payment the homebuyer must provide in order to secure the amount that is borrowed. You will find that most mortgage lenders require cash-down payments ranging from 3% to 20% to be approved for a home loan. The requirements and costs can vary for each person depending on your credit score, mortgage type, and home value. Check out this mortgage calculator to find out the approximate monthly costs of buying a house.
How Much Should I Save for a Down Payment?
Does the idea of coming up with a 20% down payment make homeownership feel too far out of reach? The good news is that few lenders will require 20% at closing. The amount you’ll need for a down payment will also depend on the type of loan you choose. Some down payment requirements can depend on whether you’re buying a primary or secondary residence or if it’s an investment property.
What Other Costs Should I Consider When Saving for a Down Payment?
Private Mortgage Insurance (PMI)
Private Mortgage Insurance, PMI is a fee added to your monthly mortgage payment if you put down less than 20%. You can estimate that the PMI will increase your monthly payment by about $50 for every $100,000 you spend on a house.
Appraisal and Inspection Fees
You will need to have your future home appraised and inspected. Each of these can cost just around $300 on average.
Closing fees vary depending on your state, loan type, and mortgage lender, so it’s vital to pay attention to these fees.
What’s the next step to start saving for your first home?
1. Know Your Budget.
Understanding what is coming in and what is going out will help you determine your budget. We’ve written a very informative blog to get you started on creating a successful budget.
2. Understand Your Expenses and Calculate Your Debt-to-Income Ratio.
Once your budget is in place, take a look at your expenses. The debt-to-income ratio (DTI) is the amount of your total monthly debt payments divided by your monthly income. This will give lenders an idea of the likelihood that you can afford to repay the loan.
3. Set a Goal.
Decide how much of a down payment you want to put down and stick to that goal.
4. Reevaluate Current Bills.
Look over the bills you currently have and do some research on specials that could help you save money. If there is something, you can pause for a few months, the sacrifice will be worth it.
5. Reduce Spending.
If you’re trying to figure out how and where to save money or if you already feel like you’re living paycheck to paycheck, set a goal to start reducing your expenses by 10%. It’s not a huge difference, but the money will add up.
- Use a streaming service instead of cable or satellite TV.
- Cook meals at home rather than eating out. Remember, small spending like fancy coffee can add up quickly in a month.
- Review your monthly auto withdraws and cancel unused subscriptions and memberships.
- Substitute a staycation for an extravagant vacation.
- Substitute generic over brand-name products.
- Buy used clothing, accessories, and furniture.
- No impulse buys.
6. Set automatic deposits or transfers to a dedicated savings account.
Start with opening a dedicated savings account that is separate from any other savings accounts you may already have. We tend not to miss the money we don't see, so set up automatic, recurring withdrawals from your primary checking account into that dedicated savings account.
These savings tips can help ensure you have enough money to become a homeowner. You will look back once you have the home of your dreams and be proud of the time and sacrifices you made.
Don’t forget that your credit score is extremely important. Before you start shopping for a house, this should be the first thing you work on, and because we love to help people, we’ve put together a helpful guide on how to improve your credit score.
“Home is where love resides, memories are created, friends always belong, and laughter never ends.”