Whether your dream is to own your first home or to purchase an investment property, you have probably realized by now that one of the things standing in-between you and your dream is having enough cash for your down payment. And the down payment is in addition to other closing costs like the appraisal fee, title search and loan origination fee. Buying a house is not cheap.
The down payment amount can vary, depending on the loan type you’re getting. An investment loan often requires 20-25% of the purchase price. Using $200,000 as an example price-point that can be $40,000-$50,000 that you need in the bank.
If you are going to move into the property, you can usually get in with less of your own money. Some loan programs require as little as 10%, 5%, or even 3.5%. Because our culture values home ownership so much, there are even special programs where you could get in for as little as $1,000. Again, using $200,000 as the example price point, and assuming you’re going with the 5% down payment loan program, that means you need $10,000.
Depending on the stage of life you’re in and your specific situation, that $50,000 might be a big challenge, or maybe the $10,000 or even the $1,000 is a huge challenge.
So the question you might be asking yourself is “how can I come up with all of that money?”
One of the first places to start is to put together your personal budget. The old, income minus expenses worksheet. I hate these things. But without it you don’t know what you’ve got to work with. One of the first times that my wife Cassie and I put together our family budget was during a Dave Ramsey Financial Peace University seminar. There we realized that we didn’t actually have a spending problem, we had an income problem. That’s part of what put me on the path to being a real estate agent and a real estate investor. But that’s a story for a different blog.
Your budget will be a work-in-progress but one important line-item to include from the beginning is SAVINGS. A long-term goal that you can have is that 15%-20% of your gross-income is dedicated to savings. Starting out you might only be at 1%, but if you don’t start somewhere, then you’ll never reach your goal.
Most people have difficulty starting the saving habit but then there is keeping the habit. The easiest way to accomplish this is to put it on autopilot. You can do this by setting up an automatic transfer from your checking account to your savings account. Even if you don’t think you have money to spare, you need to set this up now. You can start with $5.00 each month. You’ll soon realize that you don’t miss it and then you can bump it up to $25 and then $50 and so on. Set regular reminders to reconsider the amount you are saving and push the amount up as often and as much as you can.
One temptation you’ll have is to just transfer your saved money back into your checking account and spend it. To help prevent this, consider putting the savings account at a completely different institution.
When the amount of money that you are regularly saving increases, you can divide it into groups and save for multiple things. Over the years, I’ve actually opened up several accounts and used my bank’s nick-name tool so that I know that one account is for my HOME DOWN PAYMENT, one account is for VEHICLE REPAIRS OR RELACEMENT, one account is for MEDICAL EXPENSES, one account is for FAMILY VACATIONS.... ETC. I find that if I leave the whole chunk of money in one account then I feel like I have more to spend, and that's not the habit we're encouraging here. The more you put away, the more you’ll realize that you can survive without that extra cash.
The neat thing about planning ahead for these common life necessities is that it can reduce an emergency (like needing new breaks on your car) to just an inconvenience. And in our particular discussion of reaching your dream of buying a home, it can make it a reality.
It is never too early to start saving for your home down payment. Consider using some of these ideas to get you to your goal. While the topic is fresh on your mind, contact me today so that we can put together your personalized plan for getting ready to purchase your first or next home.
John Stiles is a real estate agent with Bridge Realty in Bloomington, MN.