Buying your first home is a big deal. While the benefits of home-ownership are plenty, navigating the path to buying your starter home can be intimidating. One of the biggest hurdles for first-time buyers is saving money for the down payment.
Cash Needed for a Down Payment
Shelling over your hard-earned cash for a down payment isn’t always easy. Neither is saving up for it. But if you want to buy a home, it’s necessary. To know how much you should save, you first need to know how much you can afford for your first mortgage. In general, your housing budget shouldn’t exceed more than 28 to 31 percent of your monthly income.
Your housing budget includes mortgage principal and interest, home insurance, real estate taxes and, possibly, home owners’ association fees. A 20 percent down payment can save you money on rates and fees, and also lower your monthly mortgage payment. But, while a 20 percent down payment is ideal, you can actually start as low as 3 percent down with various loan programs and down payment options.
Just keep in mind that, if your down payment is less than 20 percent, you will likely have to purchase mortgage insurance (PMI) and may pay more in closing costs.
You may want to consult a mortgage professional early on to determine how much you can qualify to borrow. A mortgage lender will review your financial situation, including credit, debt-to-income ratio and assets. This pre-qualification process also guides you in knowing how much to save for a down payment.
Saving for a Down Payment
Once you know how much you need to save, it’s time to determine your budget and timeframe to reach your goal. Start with your budget. First, review your monthly net income compared to your outgoing expenses. What do you have left over at the end of each month? How much of that can you realistically save? If you want to buy a home in three years, and need to save $10,000, then you know you need to save $278 a month to get there.
If it’s going to take longer than you would like to save the amount you need, go back to the drawing board. Can you cut out some fluff to allow for more savings? Can you take on extra hours at work or a side gig for extra money? If you want to see faster results, you will need to be more aggressive.
Automating your savings is a great way to stay on track. Set up a payroll deduction through your employer to go into your savings account, or set up an auto-transfer online. Just make sure you are making consistent, regular deposits into savings.
Additional Home-Buying Costs
First-time home buyers are often surprised to learn that, in addition to a down payment, they need to come up with closing costs, which are typically 2 percent to 5 percent of the loan amount. These costs include any loan origination fees, appraisals, title searches, surveys, taxes, credit report charge and deed recording fees. Sometimes, the seller will pay for a portion of your closing costs, but it’s not a guarantee. So, it’s a good idea to save for your closing costs, too.
Down Payment Options
When searching for your first mortgage, remember there are many down payment options. Conventional loans have become more competitive over the past few years, offering as low as 3 percent down payment options to qualified buyers. Since they aren’t backed by the government, they don’t require mortgage insurance with at least 20 percent down. FHA loans are a common option for many buyers, with a 3.5 percent down payment and more flexible credit requirements. VA loans are available for active military and veterans, with no down payment required and more lenient credit requirements. Even though no down payment is required, buyers can put any amount down.
Regardless of your current savings situation, homeownership is possible. Remember, it can take some time to save up, so the sooner you start, the better.