There are many ways to save for a down payment to buy your home, even while you are renting. Many people chose to rent for a couple of years and save as much money as they can before purchasing a home. The more money you have for your down payment, the lower your mortgage loan, and payment will be. Ultimately, you will save yourself a lot of money in the long run on interest payments.
Remember, the down payment is not the only cost associated with buying a home. If you are not getting a VA Loan or down payment assistance, you will need to plan for closing costs. Closing costs are the costs associated with paying for title searches, appraisals, insurance, taxes, and other fees when buying a house. These fees can add up quickly.
Plan to save as much as possible
The best down payment on a house is one that is at least 20% of the purchase price. This will definitely give you a good shot at the best rates possible on your mortgage. If your down payment is less than 20% of the purchase price, your mortgage may require that you purchase private mortgage insurance.
Here are some simple ways to maximize the benefits that can be obtained when getting a mortgage to buy your home, especially as a first-time homebuyer.
Determine how much house you can currently afford.
Based on your current income potential, determine how much you would be comfortable paying for a mortgage. As far as mortgages are concerned, you want to try and keep your gross payments less than 30% of your gross income. That means that if you earn $3000 per month before taxes, you want to look at homes where your payment will be less than $1000 per month. That will give you a good cushion and not overexert yourself.
Create a budget and stick to it as much as possible
One of the first things you want to do when creating a budget is to figure out your fixed costs and variable costs. Your fixed costs could be things like your insurance payments and students loans. Your variable costs include things like electric and gas bills. You want to create a way for you to pay those bills automatically and track their payments. Now you will be able to analyze your payments and see what can be trimmed or eliminated. What is left over is your savings. Based on your savings, you may want to create an account dedicated to your down payment.
Get a roommate or move in with family
It’s nice to have independence, but if you have the ability to live with a trusted friend or family member for as long as is necessary to buy a home, you will save yourself a lot of money. This will allow you to save for your down payment that much faster. Do not go on a vacation or an expensive honeymoon.
If you are really serious about saving for your down payment, you will skip that expensive trip. The average trip for a single individual can cost thousands. If you going to be buying the house with a partner, together you are a stronger force. If you are getting married before buying your home, you could cheap out on the wedding and honeymoon and even come out on top, saving a lot of money for your down payment to buy your dream home.
Pay off higher interest credit cards.
When you go to apply for your mortgage, the mortgage agent will be taking a look at your debt-to-income ratio. They want to know how much of your spending potential is going towards servicing debt. The higher the amount you owe on high interest credit cards, the less you are able to save. Try and pay off those credit cards, but do not close any of your credit card accounts. As a matter of fact, I would encourage you to ask your credit card issuers to increase your credit limit, but do not use it. This will help to boost your ratios in your favor.
Borrow from your retirement plan.
I have a friend who borrowed from his 401 (k) to pay off his mortgage. Some companies allow this. Speak to your HR department and your accountant to see how that may affect your bottom line, but it is definitely an option that could save you a lot of money on interest payments.
Get a second job.
If you have time in your schedule, consider getting a second job or picking up gigs here and there. After I left college, one of the things I did was advertise myself on Craigslist (back when Craigslist was king). People would call me to help them move. I even had a few clients where I cut their lawn (seriously, cutting lawns in Georgia’s heat is no joke). The profits from these odd jobs should go directly into your down payment savings account.
Consider an up and coming area
If you do not care where you live and your main goal is to just not pay rent, you may want to consider an up and coming area where less buyers are looking. This may give you an opportunity to profit from a potential upswing in prices in the area and gain equity. This will allow you to sell when the prices have appreciated or when your goals have changed. This will allow you to potentially use the equity from that sale to make an even larger down payment in your newly desired neighborhood.
Look into down payment assistance.
Many states and government agencies offer down payment assistance to qualified buyers. In Georgia, the Georgia Dream program is available to first-time homebuyers. This program basically offers, among other things, a zero percent down payment assistance loan. The Veterans Administration (VA) also offers loans to qualified buyers. This program will allow you to buy a home with 100% of all closing costs financed.
Plan for additional reserve savings
Furthermore, your lender’s underwriting department is going to be looking at all the liquid assets that you are going to have to remain after all your closing costs have been calculated. They want to make sure that you have a couple of months of savings remaining to pay your mortgage in the event you unexpectedly lose your income-producing potential for a short period of time.