Buying a house is a major rite of passage. While it’s fun to imagine what kind of home you’ll buy (farmhouse? Mid-century modern?), how you’ll renovate it, and what it will be like to have your own space, buying a home also requires considerable planning and financial discipline.
After all, buying a home is often the largest financial transaction you will ever make, and it can be the biggest investment of your lifetime, too; a key source of growing your personal wealth. Here is the advice you need on:
• How to prepare for buying a home
• How to save money for a house, including the down payment
• How to budget for owning a house.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What You Need to Know Before Saving for a House
Here are some important first steps toward homeownership.
Understand Your Finances
Many people have debt these days, whether student loans, a personal loan, credit card debt, a car loan, or a combination of some (or all) of these. A lot of debt could hinder your ability to save for a home and qualify for a home loan.
A number of factors come into play when applying for a mortgage, including your debt-to-income ratio (DTI). Your DTI looks at how your debt relates to the money you have coming in; what percentage of your income must go to paying what you owe. 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 others. Typically, lenders look for a DTI of 43% or lower. It is typically preferred that your DTI be closer to 36% or perhaps even lower. For this reason, as you focus on becoming a homeowner, you may want to try lowering or even eliminating your debt.
• The snowball method involves listing all your debts, then putting 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.
Debt consolidation loans 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.
Determine Your Budget
Understanding how much house you can afford is a vital step when you are contemplating buying a house. There are several factors to consider, including the home’s price, meaning how much of a down payment you can make and how much the home mortgage loan for the remaining amount will cost you. (There are other costs to consider, too; more on those below.)
You will likely find this information by doing some research online, trying out home mortgage calculators, and talking to friends and family who are homeowners.
Research Potential Mortgages
As mentioned above, understanding your potential down payment and monthly mortgage payments is an important step.
It’s also wise to acquaint yourself with the different kinds of mortgages. You may think it’s just a matter of snagging the lowest interest rate out there, but there’s more to the equation:
• Options for low- and no-money-down loans. These are available via various programs, such as VA loans for those who are active members of the military or veterans.
• Fixed- vs. variable-rate mortgages. One may be a better option than the other, depending on your financial needs and how long you plan to live in the home.
• The different terms possible for mortgages are another factor. While many people may think of a mortgage as a 30-year commitment, there are also loans ranging from 10 to 40 years in length. Depending on your financial resources and cash flow, you may want something other than a 30-year mortgage.
Establish a Solid Budget
As you look for the best way to save for a house, it’s wise to have a solid budget to help you track your money and make sure it goes where you want. That might mean funneling money toward your down payment fund as well as toward paying off debt. There are different budgeting methods you might use.
One popular one is the 50/30/20 rule. In this budget, you allocate 50% of your after-tax dollars to needs, 30% to wants, and 20% to savings.
There are many tools that can help you with budgeting, including apps. You may find that your financial institution’s app includes ways to track your spending and automate your savings.
Automating your savings can be an excellent way to help save a down payment (you’ll learn more about this in a moment). This means that money is seamlessly transferred from your checking to your designated savings account. You don’t have to expend any effort; nor do you see that money bound for savings sitting in checking where you might spend it.
Save for a Down Payment
While there are (as mentioned above) a variety of ways to save for a down payment, consider the fact that it’s a myth that you must put 20% down on a house. The reality, though, is that the median down payment on a conventional loan was around 13% last year, according to data from the National Association of Realtors.
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 only a 3.5% down payment with a 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 , as noted above, 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, and a quicker path to home equity.
Then, you can find ways to save up for a house, which can range from setting up recurring transfers into a high-yield savings account to investing in the market (more on that below). You might also consider selling stuff you no longer need or want or starting a side hustle to bring in more cash.
Consider Additional Costs
Saving money for a house is about more than you might think. It might start with a down payment, but it can also include several other important (and not insignificant) expenses. Consider the following:
Closing Costs
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 these closing costs are typically 3% to 6% of the loan amount.
Moving Costs
Moving costs aren’t insignificant: A basic local move may cost you $800 to $2,500, and a long-distance move can ring in at $2,200 to $5,700. It can be wise to get a couple of quotes from well-reviewed moving companies as you go into house-hunting mode so you can budget appropriately.
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.
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 how much renovations, repairs, and decorating could cost.
If you’re moving to a larger space, will you need an extra bedroom set? Are you thinking the backyard is perfect for a fire pit, or even a pool? If you are considering a fixer-upper, repairs or upgrades could be tens of thousands of dollars or more.
One bit of good news here is that you may not have to fork over 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.
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.
Additional Costs
In addition, you need to account for such other costs as:
• Property taxes
• Private mortgage insurance (PMI)
• Any HOA fees
• Home maintenance costs (lawn care, HVAC checkups, pest control, and the like)
• Utilities (heating a house can be pricier than a small apartment).
Invest in Your Future
As you take steps forward to afford a home, 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 transfer your investments into more stable options as you get close to retirement.
Here are 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 could grow your money faster than a cash-based account.
• If your closing day is 5 to 10 years in the future or more, consider a moderate or moderately aggressive investment portfolio that could yield higher returns in the long run.
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.
The Takeaway
Saving for a house is a big commitment and involves some focus. You’ll need to budget, consider your down payment and other upcoming costs, and also find ways to help your money grow quickly but safely.
When you are ready to buy, see what a SoFi Home Mortgage offers. With low down payments for first-time and other buyers, flexible terms, and a streamlined process, it may be just what you’re looking for.
FAQ
How much money should you save before buying a house?
When buying a house, most people focus on the down payment. Currently, most buyers put down 13%, but mortgages are available with as little as 3% or 0% down, depending on qualifications. In addition, it’s wise to budget for closing costs, home renovation and furnishing costs, as well as having an emergency fund in place.
What is the fastest way to save money for a house?
There are a variety of ways to quickly save money for a house including tracking and reducing your spending, minimizing debt, automating your savings, considering opening a high-yield savings account or investing in the market (depending on your timeline), and bringing in more income via a side hustle.
How do you realistically save for a house?
To afford a home, it can be wise to pay off or lower your debt, minimize your spending, increase your savings, sell stuff you no longer want or need, and bring in extra income through additional work.
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