Ah, the American Dream of owning homeownership, a white picket fence, and plenty of extra money in the bank. Are you a homeowner? Your home purchase might get you a place that looks different than that of your ancestors, especially as lifestyles and preferences have changed.
Why keep it a dream when you can make it part of your reality? Saving enough money for buying a house is possible when you have a strategy to accumulate savings. However, your home price will probably be the single biggest price tag you will ever see in your lifetime.
Whether you intend to buy in one year or want to wait five years, saving money for a house doesn’t have to be a strenuous task. Anyone can do it with patience and perseverance on their side.
How Much Do You Need To Buy a House?
Wouldn’t it be great if buying a house was as simple as walking into a grocery store, picking one off the shelf, and paying at the cash register?
Well, it sort of is — except to buy a house, you need a much larger sum of money in your pocket than what a gallon of milk might cost you. How much more?
One rule is to plan on 25% of the total sale price. That means if the cost of the house is $400,000, have $100,000 set aside for your down payment fund and other applicable expenses like realtor commissions, private mortgage insurance, and property taxes.
The percentage has changed through the years and varies from homebuyer to homebuyer. Before you start putting money aside and modifying your way of living, let’s explore what the house-buying experience looks like and how to reach your savings goal.
Purchase Price: What Can You Afford?
It’s time to sit down and prepare your budget. What are your financial goals? What are your expenses? Do you have any debts (credit card debt, student loans, etc.) that might interfere with your down payment savings? Take all of these factors into account when looking at your purchase price range.
Don’t rush this step. Building a comprehensive budget can help you live comfortably while building your house-buying fund. In fact, craft two budgets; one for today’s expenses so that you can begin saving towards a downpayment and a second factoring in your new mortgage payments.
Most importantly, don’t veer off track. A budget looks excellent on paper, but it is useless unless you stick to it!
Remember, your mortgage payments should not exceed 25% of your monthly income. Your mortgage payments include both the home's overall price and expenses in escrow.
How To Build a Budget
When it comes to budgeting, you have two main options: you can grab the old-school paper and pen or use technology. There are plenty of apps and templates to help get you started.
Here’s the information you’ll need:
- Monthly income (after tax)
- Fixed expenses, costs that recur each month at a set amount — rent or loan, for example.
- Variable expenses — those that vary from month to month, such as groceries and clothing.
- How much you will need to put away into your savings account.
Now that you have an itemized list of where your money goes each month, you may be surprised at your bottom line. If you are in the red, zoom in on your variable expenses. Where can you cut costs or sacrifice non-necessities during the home-buying process?
The Pre-Approval - What Is Your Credit Score?
When was the last time you checked your credit score? If it’s been a while, you ought to take a look. Mortgage lenders will pull your credit to assess risk.
FICO scores range from 300 to 850. The types of credit history that influence your score include:
- Payment history: How often are your payments on time versus late or missed?
- Inquiries: Are you looking for new credit or about to make a large purchase? How often?
- New credit: Is there an abundance of new credit added in a short period?
- Percentage owed on a credit line: Keeping the percentage of revolving credit at or under 30% benefits your credit score.
- Length of credit history: How old is your oldest account? Are there dormant accounts you haven’t used in a long time?
- A mix of credit types: This includes loans, credit credits, and more. You don’t need to have one of each, but you don’t want to weigh one category too heavy over another.
At a minimum, aim for a credit score of 620 or higher for conventional loans. It is possible to be approved for other types of loans with a lesser credit score, such as FHA loans or VA loans,
Credit scores that are too risky could result in your application being denied. Or, there is a chance of approval with the effect of a non-competitive interest rate. Do yourself a favor by being proactive, bringing your credit score to a favorable range before seeking out a lender.
Credit reports are available at no cost at AnnualCreditReport.com.
Shopping for a Mortgage Lender
Many real estate agencies require a mortgage pre-approval letter before showing houses. This letter lets an agency know that you are serious and that there is no time to waste. It also supplies your purchasing capacity, disclosing how much you can afford.
You do not have to settle on the first lender you speak with. Research lenders and shop around for quotes before proceeding with an application.
The Down Payment
A down payment reduces the price financed by a mortgage lender. It gives you buying power, proving to the lender that you are invested in this purchase.
Gone are the days when a standard 20% deposit was required. Can you still do this? Of course! You can put more down if you choose to, but you don’t have to in most cases.
The size of your down payment reduces your monthly mortgage payment, opening options for you to explore shorter terms and pay off the loan sooner.
Types of Mortgage Loans
The amount a lender requires for a down payment often depends on the type of loan you apply for.
Below are a few common home loans:
Mortgage Loan Examples
- USDA: The official name of this mortgage loan is the Single-Family Housing Guaranteed Loan Program. It is offered to families purchasing homes in rural areas (not within city limits) and requires no down payment.
- VA: This loan is an option for veterans and current military service members. It has four benefits. First, there is no minimum credit score required. Second, there is no down payment. Third, there is no mortgage insurance. Fourth, the seller can opt to pay closing costs of up to 4% of the purchase price.
- FHA: This is a popular loan choice for first-time homebuyers or families with low income or credit. The program is backed by the Federal Housing Authority.
- Good Neighbor Next Door: This program is offered to those serving in the medical and educational fields. It allows homebuyers to purchase HUD foreclosure homes at a 50% discount with as little as $100 down.
- Housing Choice Voucher Program (HCV): This is also known as Section 8 housing, serving low-income families through the issuance of housing vouchers. Specific conditions must be met to qualify for the program.
- HFA: These loans share similarities with FHA loans but are not the same. HFA tailors to low-income families only.
- Down Payment Assistance (DPA): Check with local government agencies, non-profits, or other sources that may offer grants or loans to assist with down payments. You never know if you qualify unless you try, and many people do not realize this option exists.
- Mortgage Credit Certificates (MCC) - This program gives homebuyers a tax credit equal to a specified percentage of the mortgage interest on their home. It is a credit added to your loan at the time of underwriting and is issued in many states, counties, and cities across the U.S.
Other Costs To Consider
On top of the down payment, there are other costs to prepare yourself for.
- Closing costs
- Private Mortgage Insurance (PMI)
- Appraisal and Inspection Fees
- Real Estate Agent Commission
- Moving Expenses
How Can You Start Saving?
Once you know what you can afford, you can put your budget into action and start saving.
Consider the following:
- Keep the must-haves and remove the nice-to-haves. For example, train yourself to stop impulse-buying or going to restaurants.
- Find a side hustle. If you need the extra cash and have the time, look into delivering groceries, becoming a pet sitter, or freelancing.
- Reduce your debt. If you can pay it off, you’ll be in a more favorable position financially. More importantly, don’t incur new debt.
- Set up a home-buying fund. A separate bank account keeps the money out of sight, out of mind. Setting up automatic deposits is easy, too.
The Bottom Line
Are you ready? Don’t worry: No one ever is. Buying a home is stressful, period. But by planning and preparing yourself for the process, that stress can be alleviated.
Don’t walk into buying a home blind. Build your budget, know what you can afford, save up for your down payment, and negotiate from there. Before you know it, you’ll have the keys to your new home.
Contact Acre Gold to learn how you can begin investing to save for your future. Affordable options are available.
Determine your down payment | Consumer Financial Protection Bureau
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Help Buying a New Home | USAGov