How Much to Save BEFORE Buying a Home
Owning your own home is very rewarding, but to do so, will take time, patience, and sacrifice to get.
If this a path you are wanting to take, or are on already, who is guiding you?
A guide can make all the difference between success and failure.
Our family went snowshoeing one morning on Mt. Hood after 3 feet of fresh powder had fallen the previous evening. It was quite beautiful! As we looked across the glistening snow, there was not a trail or print anywhere before us. It was one of those blind attempts at trying something new, which was a method that worked when I was single and much younger.
So much had fallen over the past few weeks that the outhouse we were next to was buried. We really had no idea where to go or how to do this since the snow was waist high on 2 of our 3 kids. Just as we finally got everyone’s gear on and were ready to plow through the snow, 2 guys in snowshoes asked if they could pass us.
“By all means and thank you very much”, was all I, Karen, could think and say.
Off they trekked, blazing a trail for us. We followed a ways behind, very grateful. Thanks to our guides, we were able to enjoy a beautiful, sunny day in fresh powder, and made memories as a family!
What would have happened if we didn’t have a guide? Our journey would likely have ended in a few arguments and everyone disappointed.
When you start the process of finding a home, you want to make sure that you have a clear path set out for you. That is why the important first step in making a home savings plan is to take stock in your why.
Start by Asking Yourself “Why?”
Start with the simple, but maybe not so simple question of, why do you want a home?
The reasons for homeownership are different for everyone.
You may hear yourself say things like: I want to own a home because … I want to move because… or I need more space because…
Knowing why you specifically want a home can help you then answer the next questions: What kind of home do you want and where do you want it?
These answers can give you a great starting point for knowing more clearly what kind of finances you will need to have saved before starting the process. They will also be great reference points for you and your real estate agent as you move through the process together.
Once you have clarified your “why”, you can move forward in educating yourself on how to buy a home and the finances involved.
This can be exciting!
Down payment
Two of the big items that will affect your home purchase are the amount of your down payment and your credit score (we will be talking about credit score in a future post…keep an eye out).
You can save a wide range from 3% to 20% (or more) which is a decision that is impacted by a home owner’s desired purchase price, loan type, how competitive they want their offer to be, etc.
We have found that first time homeowners are more often putting around 3-5% down as a down payment, compared to the 20% that you often hear.
The higher you can have in savings for a down payment the better. Any number below 20% will require private mortgage insurance (PMI). Private Mortgage Insurance is what the lender receives as insurance in case you end up defaulting on the loan and they end up not receiving the full loan amount back.
Private mortgage insurance can range from around .5% to 2.25% of the original loan amount depending on your credit score and loan type. That would mean at the $350,000 price range it could cost around $3500 (1%) a year on top of your mortgage payment if you pay less than 20% down and have lower credit. However, this PMI will be removed once you reach 20% equity in the home unless you have an FHA loan. An FHA loan is a federal loan that can be really helpful for people with low credit scores.
Online home search sites always give the “best-case scenario” mortgage payment estimate, typically with a 20% down and no PMI, so be mindful of that when looking at homes on Zillow or Redfin.
“Other” costs
On top of your down payment, you will want around two percent saved for closing costs. These are other expenses like lender fees, title fees, taxes, appraisal fees, etc. If you were purchasing a home at a $350,000 purchase price you would want to have at least an additional $7,000 (2%) saved for closing costs.
This is often a part of savings that is overlooked because it is not a “hard number”. These “other” costs depend on many different factors specific to a specific home purchase. That is why saving roughly two percent is a good starting place, however, the more you can save the better!
Earnest Money
You will be providing earnest money that will be given to the sellers if you chose to exit the contract before you have fulfilled the requirements (if you exit outside of the negotiation time frames).
Earnest money usually ranges from 1%-10% but is more often in the 1%-2% range. That would mean that if you are purchasing a home that is $350,000 your earnest money deposit would likely be about $3,500.
Important note: As long as the sale successfully closes, this money is applied towards your down payment and/or closing costs, meaning the more earnest money you pay upfront, the less you’ll pay at closing for your down payment.
Remember: These are only estimates
These numbers are only estimates. Each home purchase can include a range of percentages that are influenced by each home buyer’s personal choices, loan amounts, the market, etc.
We hope though that this at least gives you a framework to work with!
We always recommended that you talk to a lender as they will give you more detail about your specific situation.
We also recommend doing your own research. We will say it again…always do your own research!
When you do your research take advantage of all the free budgeting and financial goal planning programs online. They often include a mortgage calculator which helps you see the difference in the amount of your down payment can make on the size of the house you can afford.
Now that you have a clearer picture of how to move forward we want to leave you will three quotes to spark your mind as you start your savings journey to buying a home…