Saving for Homeownership

A good rule of thumb for most people is that the purchase price of the property should not be more than 3 to 5 times their annual salary.

Of course, there are some exceptions to this. If you have a large amount of debt, you may want to keep to a lower purchase price. You can always move up to a higher value home when your debt is more manageable. On the other hand, you may want to spend more money on a home if your income is likely to significantly increase within the next few years.

After you have an idea of how much you should spend on a house, check current real estate listings on a housing search site like Zillow or Realtor.com to see if your desired purchase price will buy you a home that suits your needs. This may cause you to reset your goal.

The down payment is the portion of the purchase price that is not borrowed from the mortgage lender.

Depending on your credit and other considerations, your mortgage lender may allow you to put down as little as 3% of the purchase price of the home you want to buy. To avoid Mortgage insurance (PMI) Private Mortgage Insurance (PMI) is a required fee for conventional home loans when the down payment is less than 20% of the home’s value, protecting lenders if the borrower defaults. private mortgage insurance , you will need a Down Payment An initial, partial payment made when purchasing a high-priced item, with the rest of the cost paid later. down payment of at least 20% of the purchase price. Mortgage insurance is a type of insurance that the mortgage lender takes to reduce risk in case you are not able to repay the mortgage. Some mortgage lenders offer programs through which they cover the cost of the mortgage insurance premiums.

You will need to know how much you can borrow to determine what you need for a down payment. [Use the Affordability Calculator on this website to help you estimate what your mortgage amount should be.] The purchase price minus the mortgage amount is the amount you need to save for a down payment but be sure that the amount you come up with is within the acceptable guidelines of your mortgage lender.

There are expenses associated with buying a home besides the down payment.

Closing Costs Closing is the final step in a real estate transaction where all legal documents are signed, money is exchanged, and ownership of the property is transferred from the seller to the buyer. Closing costs include things like a Home Inspection A professional, visual evaluation of a house’s physical condition, from the foundation to the roof. home inspection , Title Insurance A one-time payment policy that protects agains past title problems, such as liens, fraud, or errors in public records, that could cause a financial loss. title insurance , mortgage lender fees, etc. You can estimate your closing costs to be about 5% of the purchase price of the home you are buying. This is just an estimate. The closing costs can be higher or lower depending on the circumstances involved in the purchase. Some closing costs can be Financed When money is provided for something to happen. financed within the mortgage.

Professional Moving Expenses The costs associated with moving from one home to another. moving expenses for a local move usually run between $800 and $3,000 depending on the distance and how much stuff you are moving. You can do it yourself for much less. Renting a truck can be as little as $150, but you

What is your timeline? If you plan to purchase a home within the next 3 years, it is suggested that you save funds in checking, savings or high-yield savings accounts.

For long timelines, you may want to consider options that provide higher interest rates but beware of risky investments.

Regardless of where you park your money, you should set a monthly savings goal. Divide the total amount you need for a down payment and closing costs by the number of months in your timeline.

Here is an example: You decide that you want to spend $400,000 on a home that you would like to buy within 5 years. Your mortgage lender says that you qualify to borrow $360,000. You will need to come up with $40,000 for a down payment and $18,000 for closing costs. So, you will need to save $58,000 in 60 months, or almost $970 per month. (This calculation does not include moving expenses.)

You may feel overwhelmed by the process of saving for homeownership, but if you take the time to set goals and establish a realistic plan, you will get there!

• Adjust your budget – Minimizing your monthly expenses may help your savings grow faster. It is important to focus on big expenses when you think about what you can cut back on. Here are a few things to consider:
  • Compare auto insurance rates to get the best deal
  • Refinance auto loans or student loans
  • Track your spending for a full month to see where you can reduce spending
  • Cancel subscriptions you are not using
  • Cook more meals at home vs dining out
• Save raises and unexpected gains such as:
  • Tax refunds
  • Bonuses from work
  • Birthday and holiday gift money
• Look for ways to earn extra money such as starting a side gig or selling items you no longer need or use.
• Set up automatic transfers from your checking account to your savings account.
• Offer yourself a small reward for each month that you meet your goal! The reward can be as small as a cupcake or a cheap dinner out. Make sure it feels like a reward and does not break the bank.

Don’t hesitate to contact a HUD-approved counseling agent for pre-purchase counseling. They can provide you with personalized guidance and support throughout your home buying journey.