Purchasing a home is a goal that many have, but those who put a plan in place will be more likely to achieve the goal of homeownership. In this write-up, we will be talking about how to budget for a down payment so you can purchase a home of your own one day. The more you can save for a down payment, the lower your monthly mortgage payment will be. It may also allow you to have more purchase price flexibility when searching to purchase your ideal home. Budgeting ensures you are taking responsible steps to prepare for your home purchase and helps you become a successful homeowner.
How much money do you need to buy a home?
Many people save for a home without knowing exactly how much money will be needed for the purchase. Down payments vary and so do the costs associated with your home purchase but the more money you put down, the cheaper your monthly mortgage payment will be. This will greatly help your financial budget after you become a homeowner. The worst thing you can do is purchase a home and not be able to afford things like going on vacation or going out to a nice dinner.
A rule of thumb for purchasing a home is budgeting for a 20% down payment. This means that if the home you are looking to purchase is $300,000 then you should have $60,000 saved for the down payment. There are some exceptions to this like utilizing a mortgage program that allows for less of a down payment, such as 3% down or other special programs that may offer as low as 0% down. Keep in mind that if you decide to save less than 20% for your home purchase down payment, you may be required to pay Mortgage Insurance, which will increase your total monthly payment.
One mistake that first time home buyers make when budgeting is only focusing on the down payment and not thinking about the other costs associated with purchasing a home. A home buyer will often have to pay for their portion of fees such as mortgage costs, escrow and title fees, appraisal fee, home inspection fee, and others. We recommend budgeting 2% – 3% of your home purchase price for these fees. Using the same $300,000 purchase price referenced above, this would mean saving an extra $6,000 – $9,000 as a budget toward fees. There are instances however where your real estate agent, mortgage loan originator, or seller may help cover various fees for you.
Lastly, don’t forget to budget for any moving costs, home repairs and upgrades, and furnishing your new home.
Setting up a Budget for your Home Purchase
The first step in creating your budget for a home purchase down payment and other costs, is to settle on a final amount that you want to save.
The second step in creating your home purchase budget is to figure out when you would like to purchase a home. If you would like to purchase a home in 12 months, then you can figure out how much money you will need to save per month, based on your budget, to achieve that goal.
Step three is building your budget and analyzing the details to figure out how you will be able to reach your monthly savings goal according to step two above.
Here is an example how this might work based on the example above using a $300,000 home purchase goal. Our goal in this example would be to save a 20% down payment for our new home and save an extra 3% for miscellaneous home purchase costs and moving. This means that we need to save a total of $69,000 to complete our home purchase. Let’s say we already had some savings and decided to use $21,000 toward the home purchase, there would then be $48,000 more that we will need to save. If our home purchase timeline is 24 months, then we will need to save $2,000 per month in order to purchase a home in 24 months / 2 years.
Finalize Your Monthly Budget Outline
Once you know how much money you will need to save on a monthly basis, it is important to analyze your monthly income and expenses to find out where that savings will come from.
Find out how much income you make per month in your “net” paycheck, which is your final income after paying taxes and other paycheck deductions such as retirement, insurance, etc. If you feel that you will need to make more money in order to reach your home purchase goal, then there may be opportunities.
Recent technology advances have created the “gig” economy, which is where people can make extra income in their free time by providing a good or service that someone wants. For example, if your skill is social media, maybe you can be paid to help someone with social media. Or if you are crafty, you can sell your crafty item on Etsy to make some extra money. If perhaps all you have is extra time, you can make more income driving for a Transportation App or a Food Delivery service depending on where you live.
Another extra source of income many people do not think about is in their current employer. Here are some ideas: help with sales in your extra time to make commission income, see if there are any other projects you can assist with for extra pay, learn a new skill your employer needs which may lead to a pay raise or bonus, or ask if there is any availability for overtime or higher paying jobs. If there is a night shift or holiday shift, this often pays a premium.
The great thing about expenses is that you control them. Income is more difficult to control than expenses. A lot of expenses tend to be variable as well and may not be necessary. That $10 lunch you buy five days a week during work hours is a choice. Bringing your lunch to work may save you $150 per month. The $5 daily coffee can also add up to over $150 per month in expense that can be saved toward purchasing a home.
Other expenses such as a car loan, student loan, or rent are considered more of a “fixed” expense, but even these may be controlled somewhat. Perhaps sell a car for a cheaper one with a lower payment or choose to rent somewhere less expensive if it is getting in the way of savings goals.
Here are common categories of expenses that you may analyze for savings opportunities:
- Eating Out
- Travel & Misc.
- Car Payment(s)
- Health Insurance
- Life / Disability Insurance
- Audio Book
- New Clothes
- Child Care
- Debt Payments
- Student Loans
- Credit Card Payment
Once you finalize your current monthly expenses, it will be easier to locate what items can be adjusted to save more money toward your home purchase budget. Also, if you feel that your home purchase savings goal may be too high, there are many mortgage options available to purchase a home with less than 5% down payment. This may help you purchase that ideal home sooner.
Getting control of your finances will help make sure you are fully prepared for your future home purchase. We want to help make sure your home purchase is a low stress and enjoyable experience. As you move forward on your home buying or mortgage journey, we will be here by your side. At West Coast Mortgage Group, we strive to educate our clients in each stage of the purchase preparation process.
With over 16 years of residential mortgage experience, West Coast Mortgage Group has mastered the art of helping clients through the loan process and into successful homeownership. We are here to answer any questions you may have, and our team is here to assist you with your home purchase, mortgage refinance, and mortgage planning. Call us at any time for a free live consultation or schedule a meeting today!