The housing market is challenging these days, especially for first-time homebuyers. Real estate prices are high, but so is rent. How can you save for a house while still renting? Is it even possible?
This blog will explore basic budgeting for aspiring homeowners. The following text will also introduce you to first-time home buyer programs and other resources that could help with things like down payment, closing cost assistance, and general education regarding real estate transactions.
Creating and maintaining a household budget is not a glamorous task, but it’s one that pays off. If you plan to purchase a home, you need a budget. A budget is a simple document that will show you what you can afford to save every month, and will also give you encouragement to stay the course.
Most household budgets are basic, line-item spreadsheets. To create a budget, start by listing all of your monthly expenses, including the cost of dinners out and entertainment. Some people make use of apps like Mint or YNAB, others simply use Microsoft Excel or a handwritten sheet. At the end of each cycle (usually one month) enter your actual expenses and compare those to the amount you expected to spend. This will be your monthly moment of truth. You’ll find out if your household was at, under, or over budget for the month. You can then make adjustments as necessary, which is also known as “reconciling”.
Creating a budget takes time in the beginning, but eventually, the daily tracking and monthly review become routine. Stay the course and keep saving. The more money you save for a down payment, the better position you will be in to negotiate the terms of your home purchase. Plus, your budgeting skills will serve you long after the closing. Cost control builds wealth!
Budgeting for a House
The following tip will help you save for a house at a much faster rate: The amount you plan to save for a down payment should appear as a line item on your budget. Treat your “house saving fund” as a monthly expense just like the others. If you can’t save the amount you need to for this line item, then something else has to go.
How Much Should You Save?
Plan to save for a down payment as well as closing costs. In today’s competitive real estate market, even loans that do not require a down payment (such as VA or USDA) may still require a significant financial commitment from the buyer. Even if you do not have to fund a percentage of your home’s value, you will still need to prepare for closing costs like the appraisal, origination fee, and title insurance. Sellers are not likely to agree to cover any buyer costs in a low-inventory “seller’s market.”
How high will your down payment be? It depends on the purchase price as well as your loan product. Examples: FHA loans require a 3.5% down payment and Conventional loans can require upwards of 5% in down payment funds. This is in addition to the closing costs and prepaid escrow funds for things like taxes and homeowner’s insurance. If you don’t know how much to save, contact a loan officer to find out the amount of payment you could qualify for, as that will help to guide your home search and subsequent down payment requirement.
Home Buyer Programs
Programs that offer down payment assistance and education to home buyers may be available in your area. Down payment assistance can be offered in the form of a grant or a loan that needs repaying. Some home buyer assistance loans are forgivable or have repayment schedules with a delayed start of five or more years. Home buyer assistance programs may be limited to low-income borrowers and/or first-time home buyers, but programs with other parameters do exist. Ruoff Mortgage works with down payment assistance programs in multiple states, including Indiana, Kentucky, Michigan, Ohio, and Florida.
The Renter’s Deduction
Does your state of residence offer a tax deduction for renters? It could mean more money back at tax time. Ask your tax professional if this is a deduction you can claim. If you do receive a tax refund this year, save it all for your home purchase instead of spending a portion.
The saving years are also the financial education years. Read, listen, ask questions, and learn all you can about the real estate market. The Dave Ramsey podcast is a great place to start. The United States Department of Housing and Urban Development (HUD) is also a useful resource for first-timers.
And finally, find a Realtor you want to work with, even if it will be a year or more before you can buy a house. Seasoned real estate professionals are your best resource for navigating the transition from renting to owning.