Real Estate

When you buy a home, you’re making an investment in yourself and your future. You’re building financial stability, equity, and experience. You have a place to call your own and you can customize the space just how you want. Yet, you might be wondering how to get to that point — this is why saving up is so important.

There are some upfront costs to owning a home — primarily a down payment. Find out how much you should budget using a home loan affordability calculator and figure out how to save the amount you need. After all, the best way to save for a house is to formulate a budget that helps you work towards your house saving goals step by step. Soon enough, you’ll be turning the key and stepping into a home you love.

Step 1: Calculate Your Down Payment and Timeline

When figuring out how to save for a house, you may already have a savings goal and deadline in mind. For instance, you may want to save 20 percent of your home loan cost by the end of the year. If you haven’t given this much thought, sit down and crunch the numbers. Ask yourself the following questions:

• What is your ideal home cost?
• What percentage would you like to contribute as a down payment?
• What are your ideal monthly payments?
• When would you like to purchase your home?
• How long would you like your term mortgage to be?

Asking yourself these questions will reveal a realistic budget, timeline, and savings goal to work towards. For instance, say you want to buy a $250,000 house with a 20 percent down payment at a 30-year loan term length. You would need to save $50,000 as a down payment; at a 3.5 percent interest rate, your monthly payments would come out to be $898.

Step 2: Budget for the Extra Expenses

Just like a new rental, your home will have fees, taxes, and utilities that need to be budgeted for. Homeowners insurance, closing costs, and property taxes are a few examples of cash expenses. Not to mention, the cost of utilities, repairs, renovation work, and furniture. Here are a few more expenses you may have to save for:

• Appraisal costs: Appraisals assess the home’s value and are usually ordered by your mortgage lender. They can cost anywhere from $312 to $405 for a single-family home.
• Home inspection: A home inspection typically costs $279 to $399 for a single-family home. Prices vary depending on what you need inspected and how thorough you want the report to be. For instance, if you want an expert to look at your foundation, there will likely be an additional cost.
• Realtor fees: In some states, the realtor fee is 5.45 percent of the home’s purchase price. Depending on the market, the seller might pay for your realtor fee. In other places, it might be more common to contract a lawyer to look over your purchase agreement, which is usually cheaper than a realtor.
• Appraisal and closing costs: Appraisals assess the home’s value and are usually ordered by your mortgage lender. They can cost anywhere between $300 and $400 for a single-family home.

Step 3: Maximize Your Savings Contributions

Saving for a new home is easier said than done. To stay on track, first create a savings account that has a high yield if possible. Then, check in on your monthly savings goal to set up automatic contributions. By setting up automatic savings payments, you may treat this payment as a regular monthly expense.

In addition to saving more, spend less. Evaluate your budget to see what areas you could cut down or live without. For instance, creating your own workout studio at home could save you $200 a month on a gym class membership. We buy houses in Jersey City

Step 4: Work Hard for a Raise

One of the best ways to boost your savings is to increase your earnings. If you already have a job you love, put in the extra time and effort to earn a raise. Learning new skills by attending in-person or virtual training seminars or learning a new language could increase your earning potential. Not only could you land a raise, but you could add these skills to your resume.

Sometimes, putting in the extra effort doesn’t always land you a raise, and that’s okay! When getting a raise is out of the question, consider looking at other opportunities. Figure out which industry suits you and your skillset and start applying. You may end up finding your dream job, along with your desired pay.

Step 5: Create More Streams of Income

Establishing different income streams could help your house savings budget. If one source of income unexpectedly goes dry, having other sources to cut the slack is helpful. You won’t have to worry about the sudden income change when paying your monthly mortgage.

For example, creating an online course as a passive income project may earn you only $5 this month. As traffic picks up, your monthly earnings could surpass your monthly income. To create an abundant financial portfolio, there are a few different ways to do so:

• Create an online course: Write about something you’re passionate about and share your skills online. Sell your digital products on Etsy or Shopify to earn supplemental income.
• Grow a YouTube channel: Start a YouTube channel and share your skills to help others within your industry of expertise. For instance, “How to start a YouTube channel” could be its own hit.
• Invest in low-risk investments: From CD’s to money market funds, there are a few types of investments that could grow your cash with low risk.

Step 6: Pay Off Your Biggest Debts

Before taking on more debt like a mortgage, it’s important to free up your credit usage. Credit utilization is the percentage of available credit you have open compared to what you have used. If you have $200 in debt, but $1,000 available on your credit card, you’re only using 20 percent of your credit utilization. A higher credit utilization could potentially hinder your credit score over time. Not only can paying off debts feel satisfying, but it could also increase your credit score and prepare you for this next big purchase.

To pay off your debts, create an action plan. Write out all your debt accounts, how much you still owe, and their payment due dates. From there, start increasing your payments on your smallest debt. Once you pay off your smallest debt in full, you may feel more motivated to pay off your next debt account. Keep up with these good habits as you take on your mortgage account.

Step 7: Don’t Be Afraid to Ask For Help

Whether your touring homes or want help adjusting your budget, don’t hesitate to ask for help. If you’re trying to figure out what your budget should look like, research budgeting apps like Mint to build a successful financial plan.

If you’re curious about additional mortgage expenses, your budget, or investment opportunities, reach out to a trusted professional or utilize government resources. Not only are they able to help you prepare for your next big step, but they could also help you and your finances in the long term.

Step 8: Store Your Savings in a High Yield Saving Account

While you may have a perfect budget and a home savings goal, it’s time to make every dollar count. Before you add to your account, research different savings accounts and their monthly yields. The higher the yield, the more your savings could grow as long as your account is open.

In September of 2020, the national average interest rate on savings accounts was capped at 0.8 percent. If you were to deposit only $100 into a high yield savings account with an APY of 0.8 percent, you could earn $80 off your investment over the year. This helps you save extra money by just putting your money into a savings account.

In Summary

• First, set a savings goal to match your estimated down payment and mortgage monthly payments. Then add your contributions to a high yield savings account to grow your money overtime.
• Don’t forget to budget for extra mortgage expenses like appraisal costs, home inspections, realtor fees, or closing costs. Keep in mind, your monthly utilities and fees may also be more expensive than your current living situation.
• Prepare for the additional costs by increasing your earning potential and optimizing additional income stream opportunities.
• Free up your credit utilization by paying off as much debt as possible before buying a house. Keep up these good habits throughout the length of your mortgage term.

When you purchase a home, you’re building a piggy bank for your future. Every month you pay your mortgage, you pay part of it to yourself because you own the home. Instead of paying rent to someone else, you reap your own investment when you sell. Most importantly, though, you’ll have a place that’s truly your own.

Home-buying season is coming up. With the warmer weather approaching, home buyers are eagerly waiting to find their dream place.

Since buying a house is typically the biggest purchase you’ll make, preparing your finances can give you a significant win. For example, if your credit score is high enough, you can get more competitive rates with mortgage lenders.

Besides saving up for the down payment, there are other costs with the home buying process.

If you’re looking to become a homeowner soon, let me show you how to prepare your finances so that you can get a better deal on your house and still have money left over for other expenses!

Buying a House: More Than Just the Down Payment

While most attention is given to getting a good-sized down payment ready, there’s more involved than just your mortgage payments. 

Lenders are looking at factors like income, debt to income ratio, but a huge factor is also your credit score. Your credit score is based on your credit reports. You have three credit reports and scores from each of the credit bureaus – Experian, Equifax, and TransUnion.

Want the Best Rate? Boost Your Credit Score

While the exact algorithm isn’t publicly disclosed, we do know the key factors that go into calculating your score. 

• 35% Payment History
• 30% Amount Owed
• 15% Length of Credit History
• 10% New Credit
• 10% Types of Credit

Looking at how things are weighted, if you want to make the biggest impact on your credit score, you need to focus on your payment history and keeping your debts in check.

Let’s see how you can improve them which can help you boost your score before you start your home search.

The first thing you need to do is to get a copy of your credit report and make sure that it is accurate. Believe it or not, there is a chance that your report may have a mistake. In fact, it’s been estimated that more than 20% have an inaccuracy on their credit report. While it might be a minor detail like a misspelled name, if there’s any error with your payments or if it shows an open account that isn’t yours, that can really hurt you.

Because of the pandemic, you can now get your credit reports for free weekly over at AnnualCredit Report.com. If you do find a problem, you can then file a dispute with the credit bureau. In the meantime, keep your payment history in tiptop shape by automating them using your bank or credit union’s bill pay system.

You also want to keep in mind since lenders are assessing your finances to make sure you can handle a mortgage, you’ll want to make sure that your debt to income ratio is fairly low. Paying down your high-interest debts can be a huge win. If they are credit cards, after you pay them off, you may want to keep the accounts open at least until after you’ve bought your house. Lenders typically look favorably for those who have unused lines of credit. If you want to avoid the temptation of using it, you can tuck away your credit cards in an inconvenient, but safe place around your house.

Figuring Out How Much House You Can (Comfortably) Afford

Now that your credit report is accurate and your score has improved, it’s time for the next step in preparing your finances – finding out how much house you can afford. Besides having your mortgage lender calculate how much you can afford, it is also wise that you run the number yourselves. Chances are you have other goals than just buying a house.

When we were house hunting for our first place, we ran the numbers and then we checked them against what the lender had. With their calculations, we could ‘afford’ a significantly more expensive house. We looked at our number again and quickly realized if we went with their maximum budget, we’d be able to buy a house, but nothing else.

You may be thinking the same way. You’d love to buy a house, but you also want some money left over to enjoy it and other goals. You won’t be able to achieve them if your budget is maxed out on your house. You need to see for yourselves what you’re comfortable with so you can be a homeowner and still hit your goals. So how do you find out how much house you can afford?

The rule of thumb is that you should try to keep your mortgage no more than 2 ½ to 3 times your annual income. Let’s say that your family’s annual income is $65,000. Using that guideline, you’d be looking at homes around $163,000 – $195,000. If you’re a family making $120,000, then you can enjoy hunting houses between $300,000 – $360,000 and still have some money left over for other dreams.

Once you know how much you need to save you can use features like Mint’s Goals to keep track of your progress with the down payment. I’ve noticed that having a visual reminder has motivated many families towards their goals. As you hit certain milestones, have a small celebration.

Why Your Down Payment Matters

One of the biggest reasons why’d you like a larger down payment is to avoid paying private mortgage insurance (PMI). That gives lenders and extra assurance with the money they’re lending, but it can be an unnecessary weight on you.

Start automating transfers into savings with each payment, even if it’s a smaller amount than you hoped. You can then beef up your down payments by redirecting any windfall income (like a bonus, stimulus check or tax refund) into your savings. Having a bigger stash can be a huge help when you buy your home!

Closing Costs: What You Need to Know

You’ve saved your down payment, found an agent, and have found your dream house. Your offer was accepted. Before you celebrate, keep in mind there are some more expenses that come with the closing process.

I pulled out the paperwork from when we were buying a house a few ago and here’s what I found:

• Appraisal
• Home Inspection
• Homeowners’ Insurance
• Transfer Taxes
• Underwriting Fee
• Loan Discount Points
• Pre-Paid Interest
• Property Tax
• Pest Inspection

It probably seems like too much and to a degree, I can understand. Some of these fees are non-negotiable and while others aren’t. However, you want to be careful with which expenses you try to save on. Skipping a home inspection is not a smart move, even with a new build. Believe me, we’ve been there.

When we bought our first house, it was a new build and so we thought it would be fine to skip the inspection and save some cash. However, new builds don’t guarantee good work. We had small mistakes become big headaches and by the time we sold our place about five years later, we had to have all but one of the windows replaced.

Would the inspection help us catch all of these things? No, but it would’ve given us a clearer idea of expenses to expect. With our second house, we did get an inspection and not only did it help us understand what future projects we’d need to tackle, but we were also able to use it as a negotiation tool.

Your Thoughts

I hope these tips give you a jumpstart towards your goal of becoming a homeowner. I want you to buy a home that you love, but allows you to pursue all of your financial and family goals!