If you are renting a house or apartment, you have probably dreamed one day of getting rid of your rent bill and investing in your own home. Investing in property has long been part of the American dream, but the seemingly insurmountable down payment hurdle holds back most potential homeowners.
If you've been considering buying a home but are having trouble raising money, follow our step-by-step guide.
Savings for advance and closing costs
Generally, there are two main costs associated with buying a home: the down payment and the closing costs. Your down payment is an initial cost that you will put into a mortgage. You need a down payment when you buy a home to assure your lender that you will be able to make the mortgage payments and reduce the debt burden on you.
While you are not required by law to make a down payment on your home, most lenders require mortgage applicants to have 10 to 20% of their mortgage ready as a down payment before approving the rest of the loan.
If you can enter a higher percentage, you will enjoy lower monthly payments and possibly a lower interest rate. Closing costs are the expenses you will pay when you complete the purchase of your home. Closing costs can go to your mortgage provider, your real estate agent, or the person or family you are buying the home from. Some of the more common closing costs you will see include:
- Costs of the application.
Your mortgage lender may charge a fee to process your application. Not all lenders charge an application fee, and some application fees can often be negotiated. - Credit check fees. If your mortgage lender doesn't charge an application fee, you may have to pay a credit check. Credit checks allow lenders to view your credit report and score, which play an important role in determining the mortgage interest rate.
- Closing Fees or Escrow Fees. Some states require that an attorney be present at the closing of each home. Closing fees cover the cost of a real estate attorney to finalize the relocation
- Expenses for pest inspection. Pest inspection fees cover the cost of hiring an exterminator or state inspector to ensure the property is free of termites, dry rot, and other types of pest-related damage. Some states require that a pest inspection be completed before transferring the deed home.
- Estimation expenses. In some states, you will be required to pay a separate appraisal before buying a home. This appraisal is then sent to the state and determines the amount of property tax to be paid.
- Tax transfer. Transfer fees are fees that are paid when the seller transfers the title to the buyer. The specific closing costs you will have to incur depend on the state in which you are buying the home and the specific agents and lenders you work with. You may see some or all of the fees listed above, or you may see additional fees if your state requires different types of transfers or inspections. Check with a local real estate agent for more information on common closing costs in your area.
Many potential home buyers make the mistake of underestimating the true cost of owning a home. It's easy to believe that owning a home is a better deal than renting; After all, if the cost of your mortgage is less than the cost of rent and utilities, it's always better to buy the house, right? Unfortunately, there are a number of "hidden" costs of home ownership that in some cases can actually make renting less expensive. Some of the more common costs associated with buying a home rather than renting include:
- Internal repairs
When you rent an apartment, the owner is responsible for taking care of any problems with the comforts of your home. When you own a home, there is no one to call when something breaks, which means that if your heating system breaks or a bathroom overflows, you'll need to have an emergency fund to cover the bill. - Exterior repair and maintenance
If you live in a condominium or apartment, the owner or homeowners association is responsible for managing the property's exterior and for its cleanliness and safety. After purchasing your home, you are responsible for maintaining your lawn and managing potentially costly repairs and renovations, such as roof damage or pest infections. - Utility
If you live in an apartment, you will probably have to pay at least part of the condo fees. However, when you own your home, you are responsible for the cost of all the utilities you use, including water, electricity, gas, heating, garbage collection, and more. - Property insurance
Although property insurance is not explicitly required by law, it is highly recommended that you keep at least one insurance to protect yourself from damage. Otherwise, a single natural disaster can wipe out your property or make it totally uninhabitable and leave you counting.
How to save for a home
Step 1: improve your credit score.
Improve Save for a Home If you have little or no credit, take steps to improve your score before you think about buying a home. Maintaining a good or excellent credit score of at least 670 points indicates to lenders that you are spending responsibly and are likely to make your mortgage payments on time.
Mortgage lenders are more likely to forgive down payments on borrowers with high credit scores, and a good or excellent score may even qualify you for lower interest rates. Make credit card payments on time, keep a low revolving balance on your accounts, and just wait for your credit account to expire. All of this can help you improve your score over time.
Step 2: Pay off the outstanding debt.
Saving money for the down payment will be more difficult if you also pay off the debt every month. While it may seem counterintuitive, paying off your debt before you start saving for the down payment can actually help you save more by reducing what you owe in interest over time.
If you have a student loan, auto loan, or credit card debt, create a plan to pay off your debt before you start saving for your down payment. You may want to use a budgeting app to save more money and schedule monthly payments; This will help you avoid accruing interest because you have forgotten when the payment is due.
Step 3: Determine the amount of accommodation you can afford.
Once you've started saving a down payment, look for homes in your price range. Your location, your debt and your income will determine the "amount of housing" you can afford and the amount you can reasonably afford in monthly mortgage payments. Your estimated accommodation payment should never represent more than 36% of your monthly budget. To determine how much housing you can afford, first estimate how much income your family has each month. If you are an employee, you probably already know how much income you can expect each month after tax. If you are an hourly employee or independent contractor, open your bank statements for the past three months and find an average monthly income.
Multiply your monthly income after debt payments by 0.30 to get a conservative estimate of how much you can support in a monthly mortgage payment, assuming 6% of your income will go to utilities, property taxes, and home maintenance. . For example, let's say you make about $ 4,000 a month after tax. Let's also assume you need to make a minimum credit card payment of $ 100 per month and a student loan payment of $ 300.
To calculate the amount of housing you can afford, you need to subtract $ 400 (student loan payments plus credit card payments) from $ 4,000 ($ 3,600) and multiply the result by 0.30 or 30 percent. In this example, you could comfortably pay a monthly mortgage payment of around $ 1,080. Note that you may need to change this number slightly based on your county's property tax rate.
Step 4: Take a look at your home budget.
Once you have calculated the amount of accommodation you can afford, you can set a savings goal to set up your down payment! If you haven't started saving yet, you may need to look into your home budget and find places to cut back. Collaborate with your family members to prioritize savings. Add a bulletin board to your refrigerator to keep an eye on your eventual home's prize.
Final thoughts
The best way to save money quickly is to prioritize saving as soon as you get your paycheck. Most Americans make the mistake of spending their check first and then saving what (if nothing else) at the end of the month. Instead, pay yourself first by saving a percentage of your income as soon as your direct deposit arrives.
You may also want to consider opening a separate savings account to transfer your money to eliminate the temptation to tap into your own funds and help you manage your budget.