The moment you decide to buy a house is a huge one, even if it just pops into your head on a whim. It might happen while you’re getting a tour of your friend’s renovated farmhouse, or waiting for the landlord to come fix the dishwasher again. But when it happens, it changes everything.
Your first thoughts are likely excitement at the idea of having your very own space to call your own, whether it’s a countryside ranch or a high-rise condo, and you’ll join the steadily rising numbers of Americans who are choosing to become homeowners.
But for better or worse, it’s not as simple as writing a check and moving in (at least, not for most of us.) Along with being one of the biggest decisions you’ll make, purchasing a home can also be one of the most expensive.
And if you’re currently strapped with credit card debt, student loans, rent, or other large bills, it could be easy to get discouraged.
With planning, budgeting, and a solid savings plan, however, there are many roads to home ownership. Here are some key considerations for saving up for your dream home.
Consider All the Costs
Saving money for a house is about more than you might think. It might start with a down payment and closing costs, but it can also include costs like, moving expenses, buying new furniture, sprucing up the landscaping, and even that first stock-up trip to the grocery store after you move in.
And while the decision to buy might be easy, the actual buying process can require discipline, mental fortitude, and a lot of stick-to-itiveness. So grab a calculator (and maybe a glass of wine) and start drawing your financial picture.
A myth that’s been percolating in culture for a while, especially for potential homebuyers age 45 and over , is that a 20% down payment is required in order to purchase a house. The reality, though, is that the median down payment on a conventional loan was around 13% last year.
To come to your real-life goal for a down payment, you can start by calculating how much house you can afford.
One option you can look into for your mortgage loan is government programs that offer low or no-down-payment mortgage options:
• Federal Housing Administration (FHA) loans are government-backed loans. For those that qualify, they may require that only a 3.5% down payment at credit score of 580 or higher. Loan limits apply by property location.
• United States Department of Agriculture (USDA) loans offer up to 100% financing in rural areas for eligible properties and borrowers.
• Veterans Administration (VA) loans are available for military service and eligible family members with up to 100% financing.
Even though 20% down isn’t a given these days, it might still be a good idea for a number of reasons if you can swing it. First, you avoid paying private mortgage insurance (PMI), which is used to insure the lender against loss on a loan with less than 20% down. Putting 20% down could potentially mean lower monthly payments, less interest overall, a quicker path to home equity and more .
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In addition to your down payment, you’ll likely need to come to the table with your portion of the closing costs. These include fees that go along with the home buying and loan approval process, such as lender fees, payments to the home inspector, appraiser and surveyor, escrow payments, attorney and title fees, —it’s a long list, and typically falls between 2% and 5% of the home purchase price and while it’s true that closing costs can be a point of negotiation with both the seller and the lender, it can’t hurt to err on the side of caution and budget for the mid to higher percentage range on lower loan amounts. It’s good to note that some closing costs amounts are fixed no matter the loan size or purchase price.
One easy way to cut down on moving costs is to DIY the entire process, from finding free moving boxes from friends, family, and grocery stores to loading and driving your stuff across town in a friend’s truck. It’s safe to say that even the most frugal moving strategy, however, will likely incur some costs.
So even if you have every intention of moving on the cheap, it could be a smart idea to get some moving quotes. If you have a lot of stuff, or specialty items that need to be moved, or if you’re heading across the country, moving can cost thousands of dollars. At least having a ballpark figure in your head could be helpful in determining how much you’ll need to save.
Repairs and Decor
It may be difficult to estimate these costs before you have an accepted offer on a home, but it is good to keep in mind. One final line item to consider is how much you would like to put into decorating or repairing your new home.
If you’re moving to a larger space, will you need an extra bedroom set? Are you thinking the back yard is perfect for a fire pit, or even a pool? If you are considering a fixer-upper, repairs or upgrades could be thousands of dollars.
One bit of good news here is that you may not have to fork out the cash in order to pay for renovations. The FHA offers 203k rehab loans to homebuyers. Eligible improvements include structural repairs, elimination of health or safety hazards, modernization, adding or replacing roofing and you can also add loan fees and mortgage payments during renovation up to the maximum loan amount.
Luxury items such as pools, hot tubs are not eligible. The program was designed to not only help homeowners improve their own properties, but to elevate communities.
In addition, considering a fixer-upper could be a more affordable way into the housing market. The property might be available for less than market value due to needed work, and any sweat equity you put into the house could equal larger returns down the road. That said, keep in mind that not all properties are eligible for financing due to structural or other issues and the costs of home repairs can add up quickly, so it’s essential to do your research in advance.
Establish Your Timeline
It’s often one of the first questions on those online home-buying questionnaires: When are you planning to buy your home? And the answer can vary widely, from “Not until I have the money” to “I’ve already found my dream home.”
For renters, the situation is far from perfect. According to Zillow subsidiary Hotpads, a U.S. renter can expect to spend an average of 6.5 years saving for a 20% downpayment on a median-priced home. And we don’t blame you if that seems like exactly forever years from now.
There’s that really long timeframe again, but a long-term roadmap can give you time to build or improve your credit if necessary, start saving and pay down some debt (all of which could improve your position with lenders).
Another approach to a realistic timeline is that once you identify the loan program that best fits your needs and have an estimate of how much money you will need under this program, divide the total that you need to save by the amount you can afford to save each month. That can give you the number of months—or years—are left before you can buy that house.
Make an Savings Plan
Once your timeline is in place, you can choose to invest your money in ways that can help you either get to closing day sooner, or save even more than you need.
One way to think of investing for a down payment is to compare it to a retirement plan, where a common approach is to save aggressively when you’re younger, then start to your investments into more stable options as you get close to retirement.
Here’s some ways you could apply this philosophy to saving for a down payment:
• If your timeline is under 3 years, consider a conservative portfolio, or maybe a high-yield savings account.
• If you are looking at 3 to 5 years, consider a conservative or moderately conservative portfolio that can grow your money faster than a cash-based account.
• If closing day is 5 to 10 years in the future or more, consider a moderate or moderately aggressive investment portfolio that can yield higher returns in the long run.
Dealing with Debt
A lot of open, revolving debt could hinder your savings plan in a number of ways, from leaving you with little or no money left over for savings to not qualifying for a home loan.
A number of factors come into play when applying for a mortgage, including your debt-to-income ratio (DTI). Lenders use this number to assess your risk as a customer, whether you have too much debt to be able to afford your monthly mortgage payments.
Qualifying DTIs can vary depending upon elements such as credit, type of property and other. For Non Conforming or Jumbo loans, Lenders generally look for a DTI maximum of 43%. Conforming loan programs can have an eligible DTI range of up to 50%, depending upon different factors.
When you’re dealing with a long list of bills and debts, consider ways to make those payments work hardest for you. Take, for example, these three ways to approach putting as much money toward debt as possible without having to remove it from your daily budget.
• The snowball method, made popular by financial guru Dave Ramsey, is based on the philosophy that little steps can lead to big changes. Here’s how it works: Make a list of all your debts, then put extra money toward your lowest balance first while paying the minimum on the others. Once that debt is paid off, you can apply that entire payment to your next debt on top of the minimum, rinse and repeat.
• The avalanche method is similar, however it focuses on the highest-interest balance first. By eliminating that high-interest debt first, the theory goes, you’ll pay less debt over time as the money starts to roll downhill into your other payments.
• The snowflake method is a bit different in that the objective is to put any and all extra money (not already budgeted) toward debt as often as possible. Called micropayments, these can be anything from credit-card cash back to the money you pocket by eating at home instead of a restaurant.That holiday money from Grandma? Goes toward debt. Same with any work bonuses.
Loan consolidation or refinancing are two other ways that could potentially allow you to get out from under high interest payments. While they won’t eliminate your debt, with better terms, they could help reduce the number of monthly payments you’re responsible for.
Make Adjustments Based on Progress
While creating a plan can be a smart first step, that doesn’t mean it will go off without a hitch, especially if it’s long-term. You or your partner might change jobs, unexpected medical expenses might pop up, the heating bill could go way up due to a cold winter—life happens.
That’s why it’s important to check in on your budget periodically, see how you’re doing, rebalance your portfolio if needed, and make adjustments to your plan if you’ve gotten off-track from your goal.
If you’ve suddenly increased your cash flow, for example, you could determine how to divvy up that extra money. Is your emergency fund low? Should you put it toward the house?
Use it to pay off debt? Perhaps some combination of the three. Oppositely, if you’ve encountered a financial hurdle, see if you can get creative with how you move things around. For example, can you lower or eliminate one source of spending (we’re looking at you, fancy coffee) in order to move that money toward something else?
Keeping diligent track of your income and spending can help you easily see where changes can be made, but when money is spread out across several accounts, that can be challenging.
One easy way to stay on track is to use an all-inclusive app that keeps all your money information in one spot. With SoFi Relay, for example, you can see all of your accounts in one place, set multiple goals, track your spending and more. And before you know it, you could be handed the keys to your dream home.
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