Buying a home has been part of the traditional American dream for decades. However, it's a big financial commitment, and one that can haunt you for years if you jump in before you're ready.
Understand the Costs
The cost of you new home will extend far beyond your initial down payment. Don't forget to also consider the mortgage origination fees, closing costs, principal and interest, homeowner's insurance, and property taxes. Then there are utilities, renovations, home owner's association fees and the typical day-to-day maintenance costs that come with owning a home and replacing items as they age.
Understand Your Finances
Costs of home ownership aside, there's the question of whether you're in a strong position financially to make the purchase. Only after you can check off these items should you proceed:
- You're on track with your financial goals. This means you've established and are consistently funding retirement accounts and that you have eliminated all consumer debt or at least have a strong handle on it.
- You have a full emergency fund. You have three to six months of expenses stocked away.
- Your credit score is good or excellent. A good credit score translates into a lower interest rate and thousands of dollars saved over the life of the loan.
- You've run the monthly numbers. Your total living expenses with your new home should not equal more than about 25 percent of your current budget.
If you have these areas covered, the next step is to answer a few questions about your personal situation.
Understand Your Lifestyle
Before jumping in, make sure your lifestyle is conducive to home ownership by answering these questions:
- Do we know where we'd like to live for the next five years? If you're thinking of relocating or moving, you may want to wait until things are more settled to buy for the long-term. A turnaround sale could have you losing money right off the top.
- Do we have job security? If your work is highly unstable, think about how you'd make the payment if you lost your income. If you don't have the funds to cover it or a plan in place, again -- you may want to wait until you're in a more stable situation.
- Are we ready to maintain a home on a consistent basis? Plumbing issues, yard maintenance and more come with a house. Make sure you're ready to handle it yourself or shell out the funds to hire those to do it for you.
- Do we have a down payment? How much do you need for a down payment on a home in your area and what does that translate into for monthly expense? Make sure you have the cash you need on hand.
You should have at least 20 percent of the home's purchase price saved for the down payment. Any less and you'll likely be paying private mortgage insurance, designed to protect the lender in case the borrower defaults.
Understand How to Save
If you've made it to the point of saving for a down payment, you know that 20 percent of a home's purchase price is a big number. Try one of these strategies for saving up a home down payment:
- Establish a special savings fund. This is a big goal that deserves its own savings account. Look for a savings account online or at a local credit union that can offer you a decent interest rate.
- Slash unnecessary expenses. Review your expenses and note what you're willing to cut out or reduce in order to save for this goal and reallocate the funds to your new account.
- Swap it out. Swap expensive habits for cheaper alternatives, such as dining out to lunch instead of dinner, working out at home instead of at the gym, etc. Track new habits to determine extra funds on hand and transfer those savings to your home down payment fund.
- Create a budget and make room for savings. If you don't already use one, establish a budget that includes your monthly down payment savings and stick to it each month.
- Keep extra money. Whenever you receive extra cash, make it a rule to put 80 percent into your savings and spend 20 percent on yourself.
- Grow your income. If you want to pick up the pace on saving, work overtime, negotiate a raise or establish your own side hustle to earn extra money in your spare time.