As we wrap up the holiday season and get ready to flip the calendar on 2021, it's time to prepare for what 2022 has in store and to start thinking about New Year resolution ideas. Maybe you’ll want to eat healthier, shed those holiday pounds, excel in your career or maybe, you want to be like many millennials entering the housing market and take the plunge in buying a house. After all, the 2022 conventional loan limits increased, keeping pace with those ever-rising home prices. If your New Year resolution is the latter then you’re probably wondering how much cash you’ll need saved for your home purchase.
Though saving for a house and a down payment may seem like a daunting and even impossible task for some, we’ll provide some tips and tricks on how you can put enough away so that saving for a home purchase is one resolution you actually stick with!
Determining how much you can afford
If you’re just beginning your home buying journey, it’s easy to let your search for your quintessential dream home distract you from the reality of what you can actually afford.
Having a realistic idea of how much house you can afford is crucial in determining how much you need to save for a down payment. Factors you’ll need to consider are: location and what city you plan to start your search, income and whether you make enough to take on the responsibility of homeownership, monthly expenses and any debt you may have.
Another factor to consider is your debt-to-income ratio (DTI). Your DTI is taken into consideration when lenders determine whether you can afford to take on the expense of a mortgage. Calculating your debt-to-income ratio involves adding up your monthly debts (not including utility and grocery bills) and dividing that by your monthly gross income.
Once you know how much you can spend on a home purchase, you can think about what kind of down payment you’ll need.
What kind of down payment do you actually need?
Today, the reality is that few lenders actually require a traditional 20% down payment. There are distinct advantages in putting 20% down: it will save you money over the life of the loan, you will not have to pay private mortgage insurance which protects the lender in the event you default on your loan and your monthly mortgage payment will be less.
While providing 20% down is advantageous in many ways, it isn't a requirement and providing less than 20% is not a deal breaker in order to purchase a home. In fact, there are many lenders that offer loan programs with as little as 3% down. Depending on your credit score and income you can also qualify for down payment assistance.
Ultimately, how much you put down is largely up to you and your unique financial circumstance and putting 20% down may or may not be right for you.
What costs actually come with a home purchase?
There are many hidden costs that come with saving for home purchase. Don’t underestimate other upfront costs you will have to ensure you have saved in addition to the down payment.
Closing costs – Closing costs can be anywhere from 2-5% of your home’s purchase price. Sometimes, you can negotiate and have the seller pay the closing costs and some financial institutions will give you a credit for a portion of the closing costs or even cover them completely. According to Zillow, the median home price in the U.S. is $316,368.00, that means for a home that price you could be looking at anywhere from $6,000 to almost $16,000 in closing costs and that’s in addition to your down payment. That’s why shopping multiple lenders and understanding what options are available to you is so important.
Inspection fees – These fees will vary largely on what inspections the home requires. A general inspection could cost you anywhere from $400-600 depending on the size and location of the house. You may also need additional inspections such as: sewage, chimney, termite inspection or pool inspection, to name a few.
Moving costs – Another factor to consider when calculating the costs associated with a home purchase are moving expenses. Do you need to hire movers, a moving truck, boxes and packing material, and do you need a storage unit?
Homeowners insurance – If you’ve been a renter then you’ve most likely had renters insurance factored into your monthly expenses. As a homeowner, rather than renters insurance you’ll now take on homeowners insurance.
Create a budget
You’ve gone through your financial situation, know the costs associated with purchasing a home and determined what you can afford. It’s time to think about strategic ways you can start to save. Creating a budget that maps out all of your monthly expenses is a great place to start since you’ll be able to review your spending habits and determine where you can cut back.
Pro tip: If you aren’t sure how to create a budget in Excel there are tons of apps out there that can help. You can also speak with a financial advisor to help create your budget, though they may require a fee.
After you’ve created a budget, look at your essentials: rent, utilities, debt payments and your nonessentials: entertainment such as tv subscriptions, how much you eat out at restaurants, other subscription services and look to see where you might be able to cut back. Set limits for how much you allow yourself to spend each month and be strict. Then, determine an amount you can allocate for your house savings to put aside each month.
Consider any bonuses or unexpected cash off limits for immediate spending
Immediately transfer unexpected cash windfalls or bonuses to a savings account so that you aren’t tempted to spend them. Putting bonuses or tax refunds directly toward your house savings can be an added cushion and keep you pushing forward to put homeownership within reach!
Explore freelance work
Finding freelance work is increasingly more accessible in today’s gig economy, especially after the pandemic where many companies have moved online. You can also look at joining the Rideshare service industry for some extra cash.
Saving for a home takes time and effort
Ultimately, when it comes to saving for a house there are a number of factors to consider in addition to the down payment. Closing costs, inspection fees, moving costs, insurance and regular upkeep costs once you actually purchase the home are all important things that you’ll need to budget for. Stay committed to your goal and soon you’ll begin to see those savings add up.