Creating your own down payment savings plan can be a great first step in becoming a future homeowner. Understanding what you need to save and setting the time you can devote is the key to creating the savings plan that is right for you.
Buying a home requires a few initial costs and making a deposit is usually the biggest hurdle for most home buyers who buy for the first time. The good news is that you can schedule a traditional 20% deposit or consider a lower down payment. Looking at your monthly income, potential down payment, target purchase price, and other financial factors will help you set a savings goal.
Create your own backup savings plan with these things in mind:
Let’s start our own savings plan by narrowing the goal. If you know how high the potential deposit could be, then you will know how much you should have saved.
The traditional deposit for a house is 20%, but with today’s home values growing higher, a savings target of 20% can be a rapidly changing goal. Waiting longer to save 20% can have opportunity costs. The vast majority of those who buy new housing for the first time get their first mortgage possibility of low mortgage down payment. Low down payment mortgage options are available in both conventional and federally supported mortgage programs.
Here are the minimum down payment requirements for the different types of mortgages available:
- Classic mortgage: 5% minimum deposit
- Classic loan for first home buyers: 3% minimum deposit
- FHA Home Loan: Minimum deposit 3.5%.
- VA Home Loan (for American Veterans): 0% minimum deposit
- USDA Home Loan (USDA Rural Real Estate Only): 0% minimum deposit
The amount of the advance payment depends on the percentage of the purchase price of the house. Now that we’ve discussed the minimum down payment options, let’s take a look at how many homes you can afford.
How many houses can I afford?
The simple answer that would allow you to set a target price for buying a home for your own down payment savings plan involves a small multiplication. A rough estimate of your potential target house purchase price is multiplying your annual house income by 3.5 to 4.5 times. A conservative target house purchase price would be 3.5 times your annual household income and 4.5 times your annual income would be the peak of your budget.
However, the full answer to this question may be more complicated. “How many houses can I afford?” is the most popular question that potential home buyers ask our mortgage experts. Qualifying for a certain amount of mortgage means proving the financial ability to comfortably repay the mortgage every month. Discussing how many houses you can afford is an important part of the pre-approval process. As you approach the goal you set in your own down payment savings plan, remember that you should obtain preliminary mortgage approval 30 to 60 days before you start bidding.
Read more details about “How many houses can I afford?” and “Preliminary approval” in our previous blog posts.
Setting savings targets
Your own savings plan for a down payment should start with a down payment plan, but remember that there are additional costs associated with buying a new home.
Additional savings when buying a home should include the cost of estimating, inspecting and closing. Obtaining a mortgage requires and estimates the value of the property, which is generally about $ 500 to $ 700 depending on the type of property. House inspection is optional, but has many benefits and costs $ 300 to $ 500. The cost of closing varies depending on the type of mortgage you choose, but it would be good to save 2% to 5% of the purchase price to cover property fees and other closing costs.
Saving on the cost of moving and setting up your home would be a great advantage to have as a home buyer. Consider covering these costs as part of your advance savings plan:
- Rental of moving equipment or rental of moving equipment
- Professional deep cleaning
- Replacement of locks and installation of security system
- Costs of setting up engineering networks
- New appliances *
- New furniture*
- Tools and / or home security equipment *
* Remember that you should not make large purchases on credit during the mortgage process. This can affect your credit score and change your debt-to-income ratio, which can potentially prevent you from taking out your loan.
Revenue analysis and budget and in action
Knowing where your income goes each month is the first step in financial planning 101. There are endless possibilities of things you can buy with a debit or credit card, and before you know it, your disposable income each month is gone. Too many people spend without thinking about their overall financial goals. That’s why if you want to become a future homeowner, it’s important to plan where your dollars go each month.
Look at your monthly income and expenses and decide how much you can use each month to save on the down payment. The amount you save each month determines how quickly you reach your goal. With some quick additions, you can calculate how long it can take you to save enough on the down payment and other initial costs of buying your first home.
For example, if you wanted to save $ 20,000, here are some examples of your monthly contributions to your home ownership goal.
Saving $ 209 per month, would take 8 years save $ 20,000
Saving $ 334 per month, would take 5 years save $ 20,000
Saving $ 417 per month, would take 4 years save $ 20,000
Saving $ 556 per month, would take 3 years save $ 20,000
Saving $ 834 per month, would take 2 years save $ 20,000
You may also want to consider adding some additional financial resources to your advance savings plan. Depositing an annual tax return, raising funds from a retirement account, or using gifted funds from a family member can quickly increase your down payment funds.
Creating your own backup savings plan
Use our FREE worksheet Print savings plan to print to help you create your own strategy.
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