Saving for Your First Home? Start Here
Watch my full YouTube video on this topic here!
If you’re just getting started saving for your first home but don’t have much set aside yet, don’t worry! Follow these easy steps to get started.
1. Take a look at your current financial situation. What’s your credit score? Can you work to improve it? How much do you have in savings currently, beyond your emergency fund? How much debt are you carrying, and are there ways you can pay down some of that first? Getting approved for a mortgage depends a lot on your credit score and your current debt to income ratio, so work on getting that sorted out first.
2. Figure out your home-buying budget. Mortgage lenders will sometimes lend you much more money for your home than is wise to take out, depending on your income. A common rule of thumb is that your home should not cost more than 2.5 to 3 times more than your annual income. It’s also helpful to get on a real estate website like Zillow and get a good look at what kind of homes this 2.5 to 3 times your income will buy you in the market you’re shopping in, taking into account current interest rates. If you can’t find anything you like, you may want to consider continuing to rent and/or getting creative about bringing in more income. In many parts of the world, home ownership is at all-time highs, so don’t get discouraged if you can’t find homes you like at your price point. The real estate market is famous for its fluctuations so if you’re willing to be patient that will work for you as a first-time home buyer.
3. Aim to put aside a 15-20% down payment in a high-yield savings account. While you may not need this much to get into homeownership (military members, for example, have access to VA loans), this will ensure you have more than enough to cover at least a 10% down payment plus closing costs. Closing costs can run multiple thousands of dollars and be quite a surprise if you’re not prepared. If you can put down 20%, it means you won’t have to pay Private Mortgage Insurance (PMI), which will save you a lot of money in the long term.