Congratulations! Deciding that you would like to start saving towards purchasing a home is a huge first step. Becoming a homeowner is often one of the major forays into adulting. You may already know how to change your oil or how to contribute to a 401k, but homeownership is huge.
One small step into adulthood, one huge step for your bank account
The first leg of your homeownership journey can be terrifying, all thanks to the dreaded word “down payment”. A down payment amount often makes the security deposit on your rental look downright measly. A down payment is typically around 20% of the total purchase price of the house and usually no less than 10%.
Considering most homes are over $100,000, this is not chump change. Once, the down payment is taken care of you then have a host of other payments you will need to make regularly. This can include home insurance, a mortgage, HOA fees, and property tax.
So how do you go from being an oppressed renter to owning something so fancy it contains a foyer?
Figure out how much home you can afford
Many individuals will take a cue from 50 Cent and head straight to the bank to figure out loan and mortgage possibilities. This isn’t a bad idea, but you may not actually be able to afford as much as the bank lets on.
No one knows your budget better than you, so you must be the one to factor in all of your expenses in addition to the new monthly fees. With your current budget, how big of a mortgage payment can you afford monthly? What about taxes and insurance? Just because your credit score says you can afford a mega-mansion doesn’t mean that you should go out and purchase Justin and Hailey Bieber's home.
Start saving for the down payment
Once you have a handle on the numbers, then you can decide how much you would like to contribute towards a down payment. 20% is often the recommended number and by having 20% of the home cost at your disposal you will ultimately have to pay less on your mortgage, receive lower mortgage interest rates, and appeal to the seller.
So, instead of talking arbitrary amounts, let's put that in perspective. If you want to purchase a home that costs $200,000 a 20% down payment equates to $40,000. Similarly, a $300,000 home would have a 20% down payment of $60,000. Truth? For most people, these are big scary numbers.
Fortunately, you can take baby steps to get you there. Set up a monthly transaction that will automatically put a portion of your income into a savings account. If you have a date in mind about when you would like to have your down payment, you can tailor your transaction amount to meet this deadline.
Additionally, put any “jackpots” into this savings account for an extra boost. Did you receive a Christmas bonus? Win your state’s lottery? That last one may be a little far fetched but you get the picture. Apply any unexpected income to your down payment savings account.
Reducing your debt is one way to make sure that you are contributing as much money as possible toward saving for a home. The crushing weight of student debt is familiar to many, and it can make it difficult mentally and financially to plan for future goals.
Devise a strategy to consolidate loans and/or pay down any current debts. Think of it as a roadmap to your future. Once you have a clear plan as to how you will clean out the debt skeletons in your closet, you can chart a course to saving for bigger and better things.
Adjusting your lifestyle
Adjusting your lifestyle will probably happen pretty naturally. When you start paying off loans and setting aside money, your standard of living will probably seamlessly adjust. If not, you will have to make a concerted effort to curtail your spending habits. Farewell, Starbucks and so long DoorDash.
One helpful change to make is to act like you are paying your future mortgage currently. I know we are talking about adult things, but playing pretend can help you save more now and make adjustments in the future easier. By paying your savings account a “mortgage payment” each month you will be saving as well as reducing spending.
Ultimately, saving for a down payment and planning for homeownership is a marathon and not a sprint. You can make small changes to your financial lifestyle that will help you reach this goal in a few months or even a few years.
Finally, educate yourself. Escrow, mortgage, who really understands what these words mean? Having a realtor can be like having Google Translate in the flesh, but ultimately it is you who has your best interests at heart. You don’t have to apply for a course at your local community college, but do perform some research at home.
Take the time to familiarize yourself with common terms, available loans, and what purchasing a home entails. Like when traveling to a different country, if you can at least speak a few helpful phrases, you will have a much easier time finding the nearest restroom. Don’t let the home buying process be foreign to you.
As soon as you have the inclination that you would like to become a homeowner, you should start saving. It is never too early to start.
I know you see those couples on social media who seem to just have a home fall into their lap, they practically tripped and fell through the front door with keys in hand. Well, it might take a little hard work, but you too can be one of those boastful proud homeowners.
And away we go
This is the beginning of a beautifull friendship. In the meantime, are you curious to know what emotions drive your spending? Take our quiz to find out