Thinking about purchasing your first home? Taking the step to invest in one of the largest assists you will probably ever own is a big deal—and can feel overwhelming. There are several steps in the home purchasing process, but one of the biggest things is saving up for a down payment. While this may seem like a huge task, these tips on how to save for a down payment for your new home will make the progression towards becoming a first-time homeowner much easier.
This post is sponsored by CreditRepair.com. All opinions are mine alone and are honestly conveyed.
When you decide to buy a home, some important factors to consider are: location, proximity to school or work, property tax rate, income tax rate, age of home, any updates or repairs that need to be done, if the layout of the home suits your needs. While all of these factors are important in the decision-making process, one of the biggest things that you will need to do is make sure that you have an adequate down payment so that you are ready to go when you find your dream home. This part of the process will take time and careful planning to help you reach your goal quicker.
Figure out how much you can afford
The first step in the home buying process is to figure out the price range of the home that you can afford. Most conventional lenders prefer that borrowers have a low debt-to-income ratio, or DTI. So what is a good debt-to-income ratio? Well, if you are looking to get the best rate possible, you will want to aim for a debt-to-income ratio of 36 percent with no more than 28 percent going toward your mortgage payment each month. Figuring out how much of a payment you can afford helps to keep you from looking at homes that are above your budget. You may love everything about a certain house, but if the payment is $200.00 per month higher than you can afford, then you don’t want to waste your time.
Calculating your DTI
Let’s go over a quick example of how to calculate your debt-to-income ratio. For example, if your gross monthly income is $4000, then you want to keep your total monthly payments at or below $1440 per month, with no more than $1120 per month going toward your mortgage payment. So that leaves $320 per month to go toward your other bills, such as credit cards or an auto payment. Typically, monthly expenses such as groceries, utilities, or insurance payments are not calculated into your debt ratio.
Factor in taxes and homeowners insurance
Don’t forget that real estate taxes and homeowner’s insurance also factor in as part of your mortgage payment, whether you have an escrow account set up or pay them separately from your mortgage payment.
Make sure your budget is comfortable with that payment
Also keep in mind that you don’t have to max out what you qualify for. Just because your debt-to-income ratio says that you can qualify for a $250,000 house, if you are personally more comfortable with the payment that goes with a $150,000 home, then that is what you should look to buy. It is also a good idea to leave a bit of room in your budget as well. You just never know when you are going to have an unexpected car repair or need to replace an older appliance. So, make sure that you still have room in your budget for savings—for retirement and an emergency fund.
Determine how much you will need for a down payment
Most likely, you are going to want a 20 percent down payment to go toward the purchase of your new home so you can avoid paying private mortgage insurance, or PMI. Private mortgage insurance is basically insurance that you have to pay when you have a high loan amount in comparison to the value of your home. Many times, your mortgage company will require this type of insurance until you reach at least 20 percent equity in your home. If at all possible, you want to avoid paying private mortgage insurance.
Look at your time horizon
When are you looking to buy your home? One year from now…. five years from now? This is important because it will determine how much you need to save each month. This is something that you will also need to figure out within your budget. Even if you aren’t looking to buy a home right away, getting in the habit of putting the money aside can truly ease the burden when you feel that you are ready to buy.
Set up a separate savings fund
Just as you do with saving for retirement, have your down payment account for your home separate from other checking or savings. If possible, try to have an amount automatically set up to go directly to this account. When it hits your regular checking account first, it is much easier to spend than if it is taken out ahead of time.
Search for items to cut from your current budget
When you are in saving mode, it is also a good idea to look for unnecessary items in your budget that you could cut and then put that money toward your down payment account. Take a look at these items that you may be wasting money on and don’t even know it. Periodically taking a look at your budget is a good idea anyways, because it can be very eye-opening to realize exactly what you are spending money on each month.
Make sure you are credit-worthy
One of the most important factors when buying a home is your credit score. Unless you have the cash to buy your home without the need for financing, you will want to make sure that your score is as high as possible. The higher your credit score, the lower the rate you will qualify for, which means an overall lower payment for your budget each and every month. If you are not sure of where your credit stands, take a look at a free consultation from CreditRepair.com