Budgeting to Buy Your First Home
In today’s market, conventional lenders generally require anywhere from 5% to 20% down depending on your credit profile. FHA loans can go down to 3.5% and VA loans for Military Veterans require zero down. If you have the means, the more money you put down, the better. 20% down will often net you the best interest rate on the loan. That means for the average home in San Diego County (with a current median price of $425,000 going into 2014), a home buyer would need to come up with $85,000 for just the down payment. With an FHA loan, that number drops to below $15,000, and with special finance programs we have here at Royce Realty & Property Management, we can get even lower at 1% down loan, which takes you under $5,000 for a down payment on a $425,000 home. Of course, that’s just the down payment, you then have to consider closing costs, which can vary from lender to lender and the loan product you have selected.
Saving up this money takes time and careful planning. The best way to start is by coming up with a budget that is realistic enough for you to stick with and by using other tips to help you get ahead financially.
The only thing more challenging than setting up the budget is sticking with it over the long run. Using personal finance software will help you set it up, but only self-discipline and the desire for a new house will motivate you to stick with your budgeting plan.
First, you need to determine your total income from all sources. The second step is to list all the money that goes out every month, beginning with your fixed expenses. These include anything that has a fixed payment due every month, including:
- Rent or mortgage (if you have a fixed rate).
- Car payment.
- Child support and alimony.
- Installment loan payments.
Next, list your variable expenses. These may be a little more difficult to track, so you may want to document them over the course of a week or two on a chart such as the spreadsheet offered for free by a Canadian credit counseling service. Common variable expenses include:
- Cable or satellite TV.
- Anything you purchase on a daily basis (morning coffee, etc.).
I suggest that you track and update your budget regularly so that nothing falls through the cracks.
Once you have used the budget for a month or two you will be able to see where your money goes every week. This snapshot shows you where it’s being wasted and, thus, where to make cuts. Any items cut from the budget mean more money to set aside for your house.
Some of these cutbacks might include bringing a lunch from home rather than hitting the deli every day, riding your bike to work instead of driving, and using coupons at the grocery store to save money.
Bring Home More Bacon
Cutting your budget expenditures and paying down debt are not the only ways to move more quickly down the road toward home ownership. Finding ways to bring in more money gives your plan a turbo boost.
If you can take on overtime hours at work, do it. Consider holding a garage sale or selling unused items online. Sock away that extra cash for your down payment.
If you’re like a lot of us, you may be tempted to use the money you’re saving for something else that comes along. To avoid the temptation, put it in an online savings account that makes it difficult to withdraw. If you have to wait a few days for the money, you may think twice about withdrawing it.
As you build your savings, avoid the urge to add to your debt. There will be plenty of time after you buy the house to buy furniture, a car or whatever else you might be thinking of purchasing. Keep that house you want top-of-mind to motivate yourself to stay out of debt and continue saving.
For additional strategies for budgeting to make home ownership a reality, feel free to contact me, Royce Kemp, at 858-480-5570 or via email firstname.lastname@example.org and we can review your situation and personal goals to get you on the right track.