If you’re tired of renting, have found yourself noticing “For Sale” signs everywhere you go or just happen to be watching more HGTV in recent months, you may be thinking about buying your first home. Congratulations! Saving for a home is bigger than adopting a dog or buying your first new piece of furniture (Craigslist doesn’t count). And as you might imagine, that means it will take some planning to successfully update your address in the near future.
Here’s the good news…
You may not need to save as much as you think.
You may have heard parents or friends talking about a 20% down payment on a property but in fact, you can put down as little as 3%. There are pros and cons to doing so, but first, let’s look at exactly what a down payment is.
Of course, we know that your first home price will depend on where you live in the country as well as things like size, condition and age of the house. But for the sake of simplicity, let’s say you plan to purchase a home that’s listed at $200,000. Assuming you’re borrowing from a bank, credit union or other financial institution, you’ll need to come up with a down payment. This simply means the amount of money the lending institution requires you to pay before closing (and getting those keys).
Step 1: Decide how much you want to put down
If you plan to put 20% down on your $200,000 home, you’ll need to have $40,000 available, along with other closing costs. If you decide to close with 3% down, you’ll only need to have $6,000 saved for the down payment. It may sound like a no-brainer, but here are some things to consider.
Things to consider when putting down less than 20%:
Primary Mortgage Insurance or “PMI”
PMI is a way that your lender protects themselves should you be unable to make payments. When the loan amount exceeds 80% of the total home value, this additional fee typically applies. PMI is included in your monthly payment and is just one way you’ll pay more if you don’t put 20% down.
Higher mortgage payments
PMI is one way your payment increases but it also occurs when you owe a higher amount. In asking the question, “How much money should I save to buy a house”, you need to consider if taking a little more time to save up front is better than buying with 3% down and paying more every month.
Higher interest rates
Interest rates can dramatically impact not only your monthly payment but also how much extra you’ll pay over time. For example, for a $200,000 house, 4% interest rate and thirty-year mortgage, you’ll pay $139,000 in interest over the life of the loan if you put 3% down, versus $114,000 with 20% down. That’s a difference of $25,000 just in money you’ll pay to the bank!
With all the expenses you may be asking yourself, “How can I save for a house down payment”? And we get it, it seems like saving is getting harder and harder! With an increasing cost of living, student loan payments that never seem to stop and a salary that may be less than you thought you’d be earning, what options do you have?
Step 2: Come up with a savings plan
Here at Digs, we have a few suggestions – not only on how to save for a house, but how to save for a house fast! We realize it can be overwhelming not only to save for a down payment, but also all the other expenses that will come with it – closing costs, moving expenses, even setting up new utility accounts can be expensive if deposits are required. But instead of getting overwhelmed, let’s get creative! Here’s what we know:
The easiest (and most effective) way to save is to do it automatically. This means you don’t want to count on saving what’s left over at the end of the month, but rather set it up to come out first and without you having to make transfers or visit an atm.
Skip the savings account
Putting your money into the stock market if you plan to use it in the next few years is too risky, and we don’t recommend it. But choosing a savings account at your local bank doesn’t make sense either. Yes, the money will be safe, but the interest is non-existent. Even the highest savings account will return pennies on the dollar.
Check out alternatives
We created Digs as an alternative to the traditional, and often outdated, models. The process focuses exclusively on getting you to your first home purchase and we offer education, contribution matching and the ability to save in joint accounts along the way – things we’ve noticed are important in this process. In addition, our focus is on you – the first-time home buyer, so we have developed partnerships with lenders committed to helping you reach your goal.
But before you sign up – with us, or any program – you’ll need to know what your goal is and what you can afford to save. The average down payment on a house in the United States is approximately $16,000 but what you decide to save may be more or less. No matter what number you’re aiming for, remember it’s ok to start small!
Step 3: Determine your savings goal
To determine your goal, look at the homes in your area. Do you want to purchase a condo, townhome or single-family home? You can get an idea of available properties in your area from visiting any listing website or from reaching out to a local real estate agent. Once you’ve determined a good range of what you’d like to purchase, run the numbers for a 3% down payment, as well as a 20% down payment.
Know all fees outside of your down payment
You’ll also need to factor in an additional 2-4% of the total home price for costs outside of your down payment. That’s why we recommend a savings goal of at least 5-10% of the home value.
A home appraisal takes place to ensure the property is valued at or above the price you’re paying for it. This protects you as well as the bank lending you money and the cost typically comes out of your pocket.
Sometimes properties may have outstanding liens from a previous owner. In some states, even an outstanding utility bill can be treated as a lien! A title company takes the time to research any liabilities and ensure they are cleared before you close. Title Insurance covers any possible concerns related to a clear title that could show up after you are the new owner.
Buying a home is a big deal and likely one of the most expensive things you’ll purchase in your lifetime. Making sure you transfer title legally and follow local, state and federal guidelines is important.
Anytime a new loan is established, there are typically fees that are applied for processing the loan application. A mortgage loan is no different and these fees will be part of your closing costs.
To get a complete list of closing costs and understand what they include, you can reach out to a local real estate agent and ask for a sample closing sheet. Estimating 2-4% is a good start when determining your overall savings goal.
Once you have a savings goal in mind, you may want to get started right away. Great!
Step 4: Repair your credit and save surpluses
If you haven’t checked your credit in a while, now is the time. Just like building up your savings, this step takes time and patience. If you’re below 650, you should start repairing. Your credit score not only dictates the overall interest rate you’ll be given but also the total amount you can borrow. Regardless of whether you need to work on repairing or maintaining an already good score, you’ll want to monitor any activity in lockstep with your savings plan.
Easy Surplus Savings
A simple Google search will give you ideas on how to save (goodbye Starbucks habit!) so we won’t delve into all the options here. We will, however, suggest you be on the lookout for what we call “surplus savings”. These are infrequent ways you may come into some extra money. Grab it and save it before it gets absorbed into your monthly budget. Examples include an employer bonus, tax return and even a raise at the beginning of the year.
Saving for a big goal takes time so be patient with yourself. Stick to your plan and don’t be tempted to withdraw from your savings along the way. No matter how little (or how much) you see in your account, focus on the long-term goal of choosing your first home. You’ll thank your future self in the end!
The actual definition of “first-time home buyer”
At Digs, we know that you can succeed, and we believe in you! We also know it never hurts to have some help along the way. Here are a few additional programs designed to help first time home buyers. But before we look at those, keep in mind, a first-time home buyer may not be as limited as it sounds. According to the U.S. Department of Housing and Urban Development, a first-time home buyer is as follows:
- An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
- A single parent who has only owned with a former spouse while married.
- An individual who is a displaced homemaker and has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
If you qualify as a first-time home buyer, great! Here are some programs designed to help:
Federal Housing Administration (FHA) loans are backed by the Federal Government and offer options for first-time home buyers with less than stellar credit. FHA loans are also a great option for home buyers who aren’t prepared to put 20% down on their home. Although some lenders may add additional requirements to FHA minimums, these loans offer flexibility that other loans don’t.
Down payment assistance programs
Down payment assistance programs are often available by state and in some cases from the Federal Government. To learn more, visit www.hud.gov and select your state. You can also work with local experts – realtors, mortgage brokers and even title companies are great resources when it comes to new programs, as well as ways to qualify for existing programs.
A VA loan is another loan guaranteed by the government, specifically, the United States Department of Veterans. These loans have a $0 down payment option but are typically only available to Veterans, active service members and a select group of military spouses.
You can find a definitive list of first-time home buyer programs by state here too.
At Digs, we’ve created a program that offers resources and education from the beginning of your journey to getting your first set of keys. We answer the questions you need to know and offer discounts and incentives designed to save you money – whether you’re utilizing the savings component or one of our preferred mortgage lenders.
Homeownership can be one of the most daunting processes you’ll go through. You’ll spend more money than you ever have before and trust lenders and realtors to have your best interest at heart. But it also can be one of the most rewarding and exciting experiences you’ll ever have. Having your own space in the world is a feeling like no other and we can’t wait to help you succeed!