Saving for that first home can be daunting. Navigating the challenges and requirements of first-home buying is overwhelming for young families, but it doesn’t have to be.
A first-time homebuyer is not always defined as someone who has never owned a home. While it does include first-ever buyers, the definition extends to anyone who hasn’t owned a home for three years or more.
This rule also applies to displaced homemakers and single parents following a divorce, as long as they haven’t lived with a spouse in three years.
One of the advantages is that first-time home loans are generally easier to qualify for than standard mortgages. Grants and other types of financial assistance may be available to those who qualify.
Before you look into a buyer that first house, consider your current financial situation. The lender will look into your credit history as well as your debt-to-income ratio.
Paying off debt will give you a better debt-to-income ratio and will make things easier for your family to save up money for the down payment.
A good rule of thumb is to have 10-15% of the total purchase amount of the home to put toward the down payment. For a $180,000 house, this means saving $18,000 in cash before you even begin to look at houses on the market.
This may seem unmanageable, but you need to figure up how much house you can afford. Use a mortgage calculator to determine a smart borrowing amount and get a good idea of your monthly mortgage payments.
Remember to estimate homeowner’s insurance, taxes and other annual fees. The total amount should never be over 28% of your gross annual income. Again, you can do this utilizing a simple mortgage calculator.
Set up specific savings account for your down payment. Make sure it isn’t linked to your checking account so you won’t be tempted to dip into savings.
A high yield savings account is best since you could end up earning more in interest. Have a certain amount automatically deposited into the account with each paycheck. Figure up how much you need to put back each month based on the down payment estimate from a mortgage calculator.
If you have a traditional IRA, pour some extra money into it. The law allows first-time homebuyers to withdraw as much as $10,000 from their IRAs to cover homebuyer expenses. That’s a down payment for a $100,000 house!
If saving for a down payment still seems impossible, the U.S. Department of Housing and Urban Development (HUD) offers federal mortgage programs through local housing counselling agencies.
You may want to consider professional credit counselling to come up with a solid budget. Sticking to a budget for a year or more can see your savings add up quickly and you’ll have a down payment in no time.
Your local housing counselling agencies will also offer advice, free of charge for those who qualify, on saving for and buying a home. Contact your local HUD office for more information.
If you still have trouble saving money for a down payment, look into down payment assistance programs. These vary by state but may include cash grants, closing cost assistance, low-interest mortgages and even educational programs.