How to Start Saving (and Planning) for Your First Home
09 November, 2021
Owning a home has always been a staple dream for many Americans, young and old. After all, it’s a place to call your own—a place where you can choose every color, fixture, and feature to match your exact tastes. But as much as it can be exciting, it’s also a massive undertaking – and the costs are no joke.
Housing prices surged over the previous year following the beginning of the COVID-19 pandemic. A lack of land, houses, labor, and building materials all contributed to a sky-high seller’s market, putting buyers at a disadvantage (despite historically low mortgage rates).
As of November 2021, Zillow prices the typical U.S. home at $308,220. That’s an 18.4% increase since the previous year, and it’s likely to continue rising for the upcoming year. With that in mind, it’s time to buckle down and start saving. Here are ways to do just that and find your first home.
Find your Budget
You can research averages and medians all you want. But, at the end of the day, it’s up to you to figure out how much you can reasonably spend on a house. It may be more than the average you find or less. Regardless, it’s important to set up your own price range.
When you begin calculating your budget, take into account your income, debt level, and credit score. You usually need a record of at least three months’ worth of necessary and unnecessary expenses to get an accurate gauge of your habits. You can compare those costs with the estimated expenses of your potential home and mortgage.
Once you know the approximate price you can afford, you can plan accordingly.
Some costs you may want to consider while budgeting include:
A down payment is a lump sum you pay upfront on the house you buy. Meanwhile, the mortgage you take out covers the rest of the cost. You’ll usually hear about a 20% down payment. But according to Attom Data Solutions, a provider of real estate data, and its Q3 2020 U.S. Residential Property Mortgage Origination Report, the median down payment was $20,775. That turned out to be 6.6% of the median sales price.
Your down payment will depend on the home, mortgage, and lender you choose. Someone with excellent credit may be able to put less down on their home. But a larger down payment comes with perks like a smaller loan balance, lower mortgage rates, and less interest.
Closing costs are expenses and fees home buyers (and sellers!) must pay to complete the transaction. As a buyer, you must pay these costs to finalize your mortgage, which usually covers a percentage of the loan amount. ClosingCorp, a real estate data provider, reports the 2021 average closing costs on a single-family property as $3,836 excluding taxes or $6,837 with taxes. Some of the costs include:
· Application fees
· Appraisal fees
· Title insurance
· Credit check fees
· Transfer tax
· Underwriting fees
· Title search fees
These will vary depending on your circumstances, location, home, and lender.
There is more to paying for a home than the mortgage and closing costs, though. You’ll need funds after you buy the home, too. So, set money aside for the big move as well as projects you need to accomplish to start living in your new house. That may include things:
· Moving supplies
· Professional house cleaning
· Upgrades or furnishing
· Lawn care
· Internet and cable
· Maintenance and repairs
Property Taxes and HOA Fees
Renting doesn’t come with property taxes, but owning a home does. These taxes go to your local government to cover the costs of local public schools, fire departments, and roads. Usually, the amount you pay depends on the value of your home. So, higher values properties pay more in local tax rates than lower-value properties. This typically gets included in your monthly mortgage payment but separately from the principal and interest.
Additionally, you may want to move into a community with a homeowners association (HOA). These organizations set guidelines for the local homeowners to follow that help maintain uniformity and property value. They also maintain common areas, like swimming pools and parks, which the taxes go toward. You may have to pay these costs upfront at closing.
Put a Leash on Debt
One of the rules of thumb for future homeowners is that their housing costs shouldn’t exceed a third of their total income. But multiple debts, like a car loan or student loans, can make it hard to put money toward your mortgage. Over one-fourth of student loan holders feel like their debt impacts their decisions or ability to purchase a home, according to the National Association of Realtors (NAR).
So, it may be worthwhile to pay down a few debts first. Or, if you have loans with high-interest rates, think about refinancing for lower payments. That relieves you of some financial obligations and can help you obtain a better mortgage in the end. In addition, it frees up funds for later use, saving you money.
You also want to avoid picking up debts during the time you search and close on a house. That means no new credit cards or big purchases that would require financing.
Strengthen Your Credit
Your credit score is one of the biggest factors in the type of mortgage you qualify for as well as the terms. Usually, lenders tend to look at your FICO® Score for this.
So, while you are shopping around for your future home, lender, etc., work on strengthening your credit score. You can do so by paying your bills on time, keeping your credit cards open, and minimizing your monthly balance on them.
But first, you may need to check it if you haven’t in some time. There are services that provide credit monitoring of the three main bureaus (Experian, Equifax, and TransUnion) Or, you can take advantage of your annual free credit report. The Consumer Financial Protection Bureau (CFPB) recommends a checklist to ensure all the information there is accurate, too.
Prioritize and Practice Saving
You can try to save up for your future home with leftover funds at the end of the month. But oftentimes, you’ll find little money waiting for you. It’s too easy to spend first and realize the consequences later.
Instead of putting saving second to spending, reverse the order. The minute you receive your paycheck, put a portion of it into your savings. You can even automate the deposit. That way, you ensure your home does get some funding regularly, even if it’s not a lot. Some banking apps, like Envel, will do this automatically. Envel has an Autopilot feature that lets you set aside a percentage of each paycheck into a Vault (Savings Account) to help you build your savings over time.
If you can, it may be wise to put your estimated mortgage payments away as your monthly savings. You treat it like a bill, but you put it away to use for your eventual housing costs. Or, simply choose a regular amount that fits into your budget. The average monthly payment for a mortgage (as of 2019 data) is $1,487.
But struggling not to touch those savings is a common issue. If you have trouble leaving the fund alone, consider keeping your savings separate from your checking account. Envel is a great online banking tool for this since you can create multiple envelopes for each financial purpose.
Compare Your Options
Generally, it’s a good idea to get quotes from at least three mortgage lenders. However, rates are often subject to change. So, the CFPB recommends that you wait to compare official Loan Estimates before making your final decision. A loan estimate shows you the loan’s estimated interest rate, monthly payment, total closing costs, associated tax cost, and insurance cost. It will even detail features like penalties and potential changes to the payments or interest rate in the future.
The CFPB also offers an interest rate estimate tool, which allows you to explore rate options based on credit scores, location, house price, loan terms, and more. There are a variety of loans out there, with some fitting you better than others, such as:
· Conventional loans: The most common form of home loan
· FHA loans: Backed by the Federal Housing Administration and comes with looser financial and credit score requirements
· USDA loans: Backed by the U.S. Department of Agriculture for people who want to own a home in rural or certain suburban areas
· VA loans: Exclusively for veterans and current members of the armed forces and National Guard as well as their spouses
If you want to ensure you can afford the home and loan you want, consider a mortgage preapproval.
When you get preapproval, your lender tells you exactly how much they will lend you. That makes establishing a budget and shopping for a home infinitely easier. In addition, it also makes your offer stronger to sellers. They know you can actually afford the home, giving you an edge over your competition.
Be Picky with Professionals
But rates and loans aren’t the only things you should compare. Choosing the right real estate agent and house are also crucial to the success of your purchase. An experienced real estate agent knows the tips and tricks to find you the right home on the market and act as your intermediary. They can even help when it comes to negotiating the price and closing. So, don’t cut costs when it comes to the professionals you use.
Fluff Your Income
You may have already come up with your ideal home and budget and started saving. But you’re still coming up short. In that case, you may need to find ways to bulk up your income.
Switching jobs isn’t necessarily the move, though. Big changes are complicated enough without throwing in a move. Instead, consider picking up a side hustle. You can do a few hours of food delivery during the week or dog walking on the weekends. It’s really up to you. Even if it’s only a small amount of extra cash, it can help make saving for your home easier.
Think about it. Let’s say you earn $200 a week doing a side job. You can put that money towards your groceries or other necessities. That takes some financial burden off of your shoulders, making it easier to work toward saving.
Alternatively, you can see if a raise is an option at your current job.
Don’t let the above scare you; your first home is an exciting thing. It may be a high cost, but it’s a worthy financial goal since your home is one of the greatest investments you’ll make. Literally.
Just like how people invest in stocks or bonds, your home is also an investment even if you don’t rent it out or flip it. That’s because your home will likely grow in value over the years. That means your wealth increases as a result, providing you with future stability.
So, it’s important to consider your first home carefully. The more thought and planning behind your purchase, the stronger the investment.
Ashley KilroyRead more from Ashley Kilroy