Unless you'll be paying cash for a home or you are applying for a loan backed by the government (such as a USDA or VA loan) or a Fannie Mae or Freddie Mac loan, you'll need at least 20 percent of the loan amount in cash. This is the down payment, required by the lender.
The larger the down payment, the more attractive the interest rate will be. The down payment may also determine whether or not you'll be required to purchase private mortgage insurance (PMI).
You’ll also need cash for closing costs, which can add up to a significant amount of money by the time we get to closing. Some fees are negotiable and the total amount due varies. I counsel my clients to save at least 3 to 4 percent of the loan amount, just to be safe.
If you’re not a saver ― and millions of Americans aren’t ― it’s time to get into the habit. Not only will you need savings for the cash layouts of buying a home, but for its ongoing maintenance as well.
Set up a Budget
Setting up a budget is challenging but sticking to it is worse. If you have personal finance software with budget-making tools, creating the budget will be a snap. Financial guru Dave Ramsey EveryDollar® Budget Tool online and its free. Otherwise, use a spreadsheet.
The first step is to know exactly how much money you bring in every month. You’ll then need to list your fixed expenses – those that remain the same every month. Examples of these expenses include your car payment, insurance and rent or fixed mortgage payment.
Variable expenses, such as what you pay for electricity, groceries and your phone, come next. Keep track of your spending every day and enter the numbers into the budget on a weekly basis.
This budget is a snapshot of where you are spending your money, where money is being wasted and whether you are spending more than you can afford. With this knowledge you can direct your resources so that you keep up with bill payments and start saving money toward the goal of purchasing a home.
Make Lifestyle Changes
After a few months of budgeting you’ll find areas where you can cut back. Some of these might include bringing your lunch from home instead of eating out, shopping at discount stores and using coupons.
Everywhere you can make cuts in the budget allows you to put more money toward paying down debt and saving money, thus putting you one step closer to solvency and the purchase of your new home.
When your debts are paid off you can use the money that you had been using to pay them down to start building a savings account for those cash layouts involved in the home purchase.
As you build your savings, avoid the urge to add to your debt. Keep that house you want top-of-mind to motivate yourself to stay out of debt and remain solvent.
Congratulations on taking the initial steps toward ensuring you receive the most amount of money, at the lowest price, from a lender.