Buying your first home presents many challenges. Our how to save money for your first home blog post will help you to save money.
KEY TAKEAWAYS
Our how to save money for your first home contains many useful tips.
The benefits of homeownership include equity growth, a sense of pride, and tax benefits.
Figure out how much should you budget before buying a home.
Know your expenses and how to calculate your Debt-to-Income Ratio.
Set your goal for affording your first home.
Ways to limit unnecessary spending.
Take advantage of direct deposits.
How to pick up extra income.
Consider downsizing.
Meet with a lender.
Meet with a Realtor.
Benefits of Homeownership
Owning rather than renting a home gives you many benefits. According to Investopedia, homeownership provides benefits over renting like:
Equity – Every mortgage payment adds to your equity which pays out when you sell your home;
Sense of Pride – Ownership makes you feel proud; and
Tax Benefits – Many tax deductions available to homeowners offset mortgage, maintenance, and repair payments.
How To Save Money For Your First Home
Learn how to take one step at a time. Never get discouraged. Your journey begins with saving enough for your down payment.
Once you gain enough for a down payment your next step is to qualify for a mortgage. But, let’s not get ahead of ourselves. Let’s focus on how you can save enough money for your first home.
As a prospective first-time homebuyer, you may feel overwhelmed. Don’t worry. We can help you to understand the process of saving for your down payment.
Let’s explore 9 tips to help you save money.
1. How Much Should I Budget Before Buying a Home?
The first step is figuring out how much of a home can you afford. This determines the money you will need as a down payment. So, based on your location, research the price range of the home you seek. Do this by viewing real estate websites to see the value of the home you desire in a certain neighborhood.
If you don’t have enough cash for a down payment, don’t worry.
You probably read about conventional private loans demanding a 20 percent down payment. For a $300,000 house that would equal $60,000.
Don’t panic. Many federal and state loan programs exist especially for first-time home buyers to reduce the down payment.
Once you know the price range, you must figure out which of these loan programs you qualify for. These programs will cut fees and costs making it easier for you to obtain a down payment.
Bankrate recently published an article explaining “5 first-time homebuyer programs in 2022” including several federal government programs only requiring a 3 percent down payment for first-time homebuyers. These include:
Low-down payments on conventional loans;
Low-down payments with government loans; and
Several other loans for qualified buyers.
In California, several federally subsidized loan programs exist for first-time homebuyers along with state grant programs. For more information, read our informative blog post about First-Time Homebuyer Programs including federal, California, and San Diego programs.
2. Know Your Expenses and Calculate Your Debt-to-Income Ratio
After figuring out your budget and researching what government mortgage programs you qualify for, you must add up your monthly expenses.
See how your gross monthly income stacks up to your normal bills (credit card debt, car payments, student loans, etc.).
Then, estimate your future homeownership expenses (mortgage payments, home insurance, property tax, etc.). These expenses shouldn’t amount to more than a third of your monthly income. Likewise, you must consider all your future monthly housing expenses.
When you apply for a mortgage, your lender will add up these expenses and income. This will determine your ability to repay your loan. It’s based on your debt-to-income ratio. This ratio shouldn’t be more than 40%.
Read our broker’s post explaining “What Debt To Income Ratio I Need To Buy a Home”. It goes into great detail so you understand how this ratio works.
If your Debt-to-Income ratio (DTI) is too high, you must lower your debt to qualify for the ideal mortgage. Read this article by Rocket Mortgage to learn how to reduce your debt before applying for a mortgage.
3. Set Your Goal
After determining your estimated budget and your debt ratio, set a goal. This includes calculating the minimum down payment amount you need to buy your dream home.
Your target goal lets you know how much to save for your down payment. Include a timeline to achieve your goal.
For example, “I want to save $10,000 by the New Year”.
4. Limit Unnecessary Spending
When you review your monthly expenses figure out which ones you can reduce. Cutting back on unnecessary expenses will help you to save for a down payment.
What are “unnecessary expenses”? These may include a gym or club membership you don’t use as much anymore. Or, that extra cable package you no longer have the time to watch. Instead of eating out at restaurants, save money cooking at home.
Ask: Do you need the extra car insurance? Can you make fewer long-distance phone calls (use free Zoom instead)? Instead of meeting friends at a lounge bar invite them over for BYOB drinks. As you see, many ways to reduce your spending exist.
Avoid impulse buying. Looking to buy a new TV? If you don’t need it, put that money into your bank account.
Funnel those saved expenses into your savings account.
Also, bank all windfalls, gifted funds, and work bonuses. Cash birthday gifts go to your bank. These may seem small, but over time they help your savings to grow.
5. Take Advantage of Direct Deposits
Instead of cashing your paychecks and celebrating ask your boss about direct payments to your bank account, That way, your money gets deposited every payday lowering the temptation to spend some of it.
6. Pick Up Extra Income
If you have the time, consider a side hustle. Here are some ways to earn extra income while keeping your current job.
Drive for a Rideshare Company – Uber and Lyft allow you to earn side income based on your hours. You need a nice car kept clean and clutter-free to contract with a rideshare company. You can work evenings and weekends to supplement your day job income.
Pick up Remote Freelance Work – The recent pandemic created a cottage work-from-home industry that millions of Americans engage in. You can pick up freelance work using your professional skills like copywriting ads, content writing blogs, and web pages, or marketing services. Craigslist contains many opportunities for freelance workers of all types. National job-seeking sites like Indeed, Glassdoor Jobs, and even LinkedIn are worth looking into.
Test Apps – Software companies need typical users to test their apps and websites. You can test products in your spare time. Here are some testing companies looking to hire testers: Testbirds and UserTesting.
7. Consider Downsizing
If you can’t come up with enough savings for your down payment, consider downsizing. Your first home doesn’t have to meet all your desired features. Starting small and selling later to use your equity to buy a bigger home makes sense.
Buying a condo instead of a house will start you with affordable home ownership you can build on. Instead of buying a four-bedroom home, buy a one or two-bedroom with enough lot space to add extra rooms as your family grows.
Instead of moving into an expensive neighborhood, consider an up-and-coming neighborhood at less cost. Own a home before property values appreciate to gain you extra equity faster.
8. Meet with a Lender
Don’t expect to research and discover every first-time homebuyer loan program by yourself. Meet with a lender or a mortgage broker. It won’t cost you anything. Yet, you may discover money-saving loan programs you never heard of.
Get a pre-approval mortgage letter. This gives sellers confidence that you can qualify for a mortgage and buy the home, Investopedia wrote a good article about the process titled, “How to Get Pre-approved for a Mortgage”.
We published a blog post about “What is Important When Selecting a Mortgage Lender?”. It explains how to find and choose the best fit based on your situation and needs.
9. Meet with a Realtor
Meeting with a local Realtor before searching for your first home will make it easier. An experienced Realtor knows the local neighborhoods to help you find your ideal first home faster.
Read our posts to learn the benefits of using a Realtor:
How To Save Money For Your First Home – Conclusion
Our tips about how to save money for your first home focus on putting a solid plan in place.
Why worry about saving for a 20% down payment when you might qualify for a 3% down payment? If you are a veteran or a service member you can qualify with 0% down with a VA loan.
Figuring out your income-to-debt ratio and estimating how much of a down payment you need sets your goals. Cutting expenses and increasing your savings account go a long way towards meeting your goals.
Thinking of Buying a Home in San Diego?
SoCal Lifestyle Realty offers experienced Realtors who know all the communities and neighborhoods in San Diego County. We can help you to relocate from outside San Diego County or move to another neighborhood.
Contact us before searching for your new home as our post explains how an experienced Realtor can help you in more ways than finding your first home.