Buying your first home and building long-term wealth

Saving up for a down payment can seem like an insurmountable task for many buyers. And yet, with clearly defined goals and a realistic savings plan, it’s possible to make that dream a reality with clearly defined goals and a realistic savings plan of buying your first home.

How much you need to save to buy your first home

It’s virtually impossible to achieve a goal without first precisely defining what that goal is. This is particularly true concerning financial goals.

Start by browsing available listings on a site like Zillow to getting a sense of prices in your target market and come up with. Browse available listings on a site like Zillow to get a ballpark figure of the likely purchase price.

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Next, make sure that you’ll be able to afford the monthly mortgage payment on for a home in that your price range. A good rule of thumb is to make sure that your mortgage payment doesn’t exceed 28 percent of your monthly income.

Once you know how much you can afford and what a house is likely to cost and how much you can afford, you can get a better idea of the amount needed you’ll need for a down payment. According to the National Association of Realtors, the median down payment on a house is seven percent for first-time buyers, or about $18,620, on a house based on the U.S. median.

While seven percent of the potential purchase price is a good starting point, research and explore all available mortgage programs to see what you’re are likely to qualify for. Each mortgage program will have different down payment requirements.

For instance, a popular option for first-time homebuyers is a Federal Housing Administration (FHA) loan. FHA loans allow first-time buyers to put down as little as 3.5 percent of the purchase price.

However, there are some program restrictions, and you’ll be required to pay a monthly mortgage insurance premium (MIP), which can increase your total monthly payment. Before you make any decisions, spend some time at the outset comparing home loans to find your best option.

Once you’ve have determined the minimum amount needed for a down payment, it’s time to start saving. Of course, if you can save more than the minimum, you’ll be able to put down a larger down payment.

A larger down payment could mean lead to more attractive favorable loan terms and more equity in your property, and you may even qualify for a larger mortgage loan. There are some useful tools to assist in calculating the mortgage amount you are likely to be eligible for.

How to save for a down payment

 

Budget and pay down your debts

If you want to buy a home and not currently budgeting, it is imperative to start immediately. Monitor your spending using budget templates or a mobile app. Do this for a month or two to determine where your money is going.

Figure out how much disposable income you can set aside each month. Identify expenses where you can cut back. If a large percentage of your monthly income is going toward your student loans and high-interest credit cards, consider refinancing or paying off your these debts prior before to saving for a home.

If retirement is still many years away, consider making smaller contributions to your retirement savings until after you buy your first home.

 

Choose a savings account wisely

Once you’re are ready to start saving, think about how you can protect this money. Your best bet is to deposit your money into a separate account specifically for your down payment. A money market account is a great, safe option for this. These funds are generally off-limits and at least earn some interest over time.

Conversely, investing the funds in stocks could lead to significant losses and crush your dreams of buying your first home. Likewise, putting the funds in your checking account could lead to increased spending and make it harder to save.

Think about setting up a monthly automatic transfer of a fixed amount from your primary account into the account you’ve set up to save for your down payment.

 

Decide on a savings strategy

After you’ve set up a budget template, made spending cuts, and started saving, determine how much you can contribute to your home savings each month. If your goal is to buy your first home in the next 12 to 24 months, it’s a good idea to put away as much as possible toward your down payment.

If you’ve done everything you reasonably can to reduce your spending, and you’re still struggling to save enough each month to reach your goal within your desired timeframe, consider ways to increase your income. Could you take a temporary second job or a few hours of freelance work per week, just until you’ve saved enough for a down payment?

Recognize that in today’s economy, there are countless ways to work from the comfort of your own home in your free time. Even a few hours per week of freelance work, for instance, can go a long way toward boosting your savings.

Friends and family may also be able to help. Share your goal of purchasing a home with everyone you know. Not only will they encourage and help hold you accountable to your goal, but they may even contribute to your savings.

If it’s not possible to increase your income at your current job or take on additional work, and obtaining help from family or friends is not an option, it may be wise to reevaluate what you can afford or the timeframe in which you want to buy your first home.

Above all, try to have fun with the process. Buying your first home is exciting. By educating yourself and being proactive, you can remove much of the uncertainty that keeps many people from realizing the dream of homeownership.