Congratulations! You’ve decided to start saving for your very first home. The process of saving for a downpayment can be scary, intimidating, and extremely stressful…and that’s just researching it!
The journey to becoming a homeowner comes with a lot of confusing terms, methods, and strategies that can give even the financially savvy a headache. The key to saving for your dream home is sticking to the basics.
Once you have those down you can utilize additional strategies that fit YOUR financial situation.
Know Your Budget (and stick to it!)
Something so simple that people tend to shove aside is BUDGET. Budgeting (and sticking to it) is the single most important part of saving for a home. It’s no secret that sticking to a strict budget isn’t fun. But it’s essential to keep the end goal in mind or you will find yourself getting impatient with the process.
When thinking about prices, opt for the golden rule that your monthly mortgage payment should not exceed 28 percent of your monthly income. Data pulled from the Lender’s Network shows that the average cost of a downpayment is $14,000 or 6% of the purchase price. While 6% of the purchase price is average, there are benefits to putting down a 20% downpayment.
Benefits of a 20% down payment:
- Lower debt-to-income ratio
- Qualify for a bigger house
- Lower monthly mortgage
- Easier to qualify for a loan
- Lower interest rate
Pick a time and amount goal and curate a savings plan that can work around that. It’s important to be realistic with your percentages. What are you really willing to put aside to save for your home? Pick a number that you feel 100% comfortable with and that you know you can be consistent with.
Start by using the 50/30/20 budget plan and edit these percentages as you see fit!
Open a Savings Account
The best way to start saving for a home is to actually start saving! Open an account and start allocating money from your paycheck to this account.
If you can only do $50 a month, then commit to it! Just like most savings plans, starting can be the hardest part. Once you begin putting money aside and stay consistent, that number will start adding up quicker than you realize.
Amy Wegenaar told The New York Times how she saved up to buy her own place while barely paying for her Lower East Side apartment. She started by saving $400 a month from her paychecks, and putting any raises and bonuses in this account. Within the next year she had saved nearly $10,000.
Learn more about how to start saving here.
Build Your Credit
In order to be qualified to buy a home, you MUST build your credit. This is essential when making large purchases of any kind, especially a home. You need to prove that you can pay bills on time and pay off debt (which you are likely to have post-purchase). Learn more about building your credit here.
Cut Out Unnecessary Spending
It’s time to put your spending habits under a microscope. If you are going to start saving for a major purchase like a house, you have to get comfortable with being uncomfortable. You will have to cut back on unnecessary spending that you have become accustomed to making.
Janey Lee and Pablo Agüero recently shared with The New York Times how 2 struggling freelance Web designers were able to buy an apartment in Manhattan. Both had debt to pay off and bills from their wedding that still needed to be taken care of. The only way they were able to succeed is by cutting out ALL useless purchases. They gave up smoking, stopped getting beers after work, quit shopping for new clothes, and only bought things they absolutely needed.
The question you will have to continuously ask yourself is “Do I want the house or a new phone? or Do I want a latte or the house?”
Here are a few ways to keep your monthly bills low to help your save more, faster!
Windfall is a financial term for unexpectedly coming into money. No, we are not talking about if you happen to win a billion dollars in the lottery. We are talking about acquiring money through stock market investments, inheritance, or work bonuses/promotions.
Many people take unexpected money and put it towards something fun like a road trip or a new pair of shoes. However, these larger amounts of money are what will help take your savings to the next level. If you happen to come across one of these windfall scenario during your savings process be sure to use it wisely!
Here’s how one couple used their windfall to buy a house.
These are the basics to start saving for your very first home. It can be intimidating, but by taking these small steps you will be surprised with how quickly you can save! Make the savings process even faster and find out how you can save over $72 in just 2 years!