Let’s talk about how to save for your down payment on a first home. The first house you own, whether it’s your own or a rental property, is the toughest to get through. Let’s talk about what you need to know about down payments and the closing costs.
Saving is hard. Everybody likes to spend money and buy things. Saving is difficult; however, it becomes even more difficult when you do not know how much you need to save up for something. If you’ve never bought a house before, you might not even know how much you need to have. Also, if you have no idea of the closing costs, down payment options, or other essential things, it becomes challenging to know how much you even need to save.
So to start with, let’s figure out what precisely that figure is.
Down Payment Amount
The first thing you need to consider is your down payment amount. I have different videos on this channel about the actual costs involved in buying a home. However, to give you a cliff note version, if you’re getting an FHA loan, you will need 3½% of the purchase price as your down payment on the home.
Now, if your credit is good, let’s say above a 680 or in 700-range, you will be able to get a conventional loan as a first time home buyer for only 3% down. This will save you another ½%.
In addition to the down payment, you also need to factor in closing costs. Now, depending on the cost of the house, this can be anywhere from $8,000 – $20,000. If you’re buying a smaller home or in an area where homes are a little cheaper, perhaps in the $200,000 range, you might only have between $6,000 – $8,000 closing costs.
If you’re in San Francisco and a two-bedroom is running you well over a million, you might have $20,000 in closing costs at the end of the day. Hence, keep in mind that on top of the 3% or 3½%, there is still the closing costs.
To give you a rough ballpark number, let’s assume you’re buying a home for $300,000; 3% of that is $9,000. So you need $9,000 for the down payment. Now, assuming you paid the closing costs in total, which might be somewhere around $11,000, you will need at least $20,000 in cash. This will cover the closing costs plus the down payment.
How to Avoid Paying Closing Costs
There’s a way not to pay closing costs. You can get something called a seller concession from the seller, or you can get a lender credit. Lender credits are offered at higher interest rates. When buying or leasing a car, you can buy the rate down by putting extra money upfront to get a lower interest rate. When it comes to buying a home, you could do the opposite by opting to get a higher interest rate.
So if you were going to get something like a 4% loan, and you do not have enough for the closing costs, you can get a 4¼% loan. It might be a little more every month, but it would also get you several thousand dollars in closing costs paid by the lender.
This is a great technique to save money on closing costs. If you’re in a rush to get that house, it’s possible to be able to afford a larger monthly payment, but not the money for a down payment. So if you are strapped for saving, getting lender credits is a great way to do it. It’s even better on an FHA loan where rates are low to start. This helps you get a little more bang for your buck when it comes to opting for a higher interest rate.
How Much Do You Qualify For?
The next question you have to ask yourself before you even think about saving is how much do you qualify for? If you don’t quite know the whole debt to income (DTI), loan to value and other related stuff, there are other videos on this channel about figuring out how much you qualify for.
However, I’ll give you the quickest formula you can have in a nutshell. To start with:
- Take your gross monthly salary. If you work hourly, this is your pre-tax amount.
- If you are on salary, divide it by 12. If you’re making $25 hourly, multiply that by 40 hours a week, then multiply it by 52 weeks a year.
- Divide your result by 12.
To get a gross monthly salary, divide that in half. Let’s say you’re making $6,000 a month. Your gross monthly salary is $3000, which will be your starting point.
Now that you have gotten your grossly monthly salary, subtract any debts. By debts, I mean the things that’ll show up on your credit card report, primarily the big three debts: credit card debt, car payments, and student loans.
Whatever your monthly minimum is on the credit cards is what you use to measure your debts. So you might have $800 or $1,200 on your credit card, and the minimum monthly payment might only be 40 or 50 bucks. That’s all you need to subtract. So from your monthly gross amount ($3,000), you remove your car payment, student loans and everything and let’s say you end up with $2,700. That’s the maximum they will charge for your mortgage, interest, tax, etc.
It’s a bit more complicated; this is only a brief explanation. So I recommend you watch one of my videos on how to figure out the math on how much you can qualify for.
So let’s say you can afford a loan on a $400,000 property, and you need to come up with a 3% down and perhaps, a little bit of the closing cost. If you don’t want a crazy high-interest rate, you have to save at least $12,000 – $15,000. This will serve as your first goal, which brings us to our next point.
Setting goals is a crucial step. A goal is something you can control. A goal is not, “I hope I get money”, or “I hope I get this job”, or “I’m going to be a YouTube star or an Instagram celebrity, and then I’ll put aside several thousand a month”. These are not goals; they are dreams and wishes. Instead, a goal is something you can control. So if out of what you earn monthly, you decide on a realistic portion to save, that’s a goal. Let’s assume you make $6,000 gross a month, and you choose to put aside $500 or $700 monthly; that’s a goal.
Set realistic goals. It’s okay if saving up for your first house stretches you out a little. It’s not going to be easy. If it were easy, you would’ve done it already, but it’s good to have goals that stretch you a little because they help you get to the next level of life. You get to the next level of wealth by making sacrifices and going towards a larger and long term goal.
What Should you Sacrifice?
It’s essential that once you’ve established your goal, you should know what you’re giving up to get to your goal. So the first thing you should do is have an honest conversation with yourself. Print out your bank statement. If you pay everything on a debit card, print out your debit card statement. If you do it on a credit card, do that. If you still pay for things in cash, make a ledger. If you’re using Venmo, really analyze what you’re spending your money on every month.
Ideally, you might need to come up with a spreadsheet. If you do not have Microsoft Excel or Pages, you can use Google sheets. It’s free software on Google. Make a Google spreadsheet and list every payment. In the second column, list the actual price. In the third column, categorize the payment. Is this an electricity bill, a school loan, or entertainment? You also want to pay close attention to anything non-essential, for example, entertainment, eating out, extracurricular activities, frivolous monthly subscriptions.
If it’s a viable option, you might want to sacrifice a gym membership and start working out at home. You can make sacrifices that do not harm your mental or physical health. Deeply reflect on where your money goes to. Some people spend several hundred dollars a month on Starbucks. That’s easy to cut out. If you’re trying to save for a house, get a good grip on what you’re spending money on. Then you can start to sort what you can afford comfortably by knowing what you’re going to sacrifice.
Set up a Separate Account.
Keeping a ledger is good but setting up a separate bank account is better. Now in an ideal world, you would want to set up a bank account that’s hard to extract money from, like a money market account or a savings account; something where it isn’t easy to get it out once you put it in. You can use bank accounts with transfer and withdrawal limits. Put it in an account that you will not be tempted to take it out.
For example, I save money for my property tax and insurance every month. I don’t have an impounded or an escrow account on my mortgage. I have to pay those bills separate for my mortgage. So I have an automatic withdrawal for my property tax and insurance that goes into a different account every month. Hence, the money is available when the bill comes in at the end of the year. I do not touch it, as I do not have a debit card for the account. I cut up the debit card I got for it. I do not use this account for anything other than paying my property tax and insurance, and some savings.
Get a separate and dedicated account. Some services do this for you. Truebill is a good one. It has a vacation fund, which is an excellent way to put money away towards a vacation. I haven’t used the vacation function myself, but I’ve seen it. Whatever service you use, make sure it’s an account you have access to. TrueBill is also great for showing you what you’re spending your money on. It shows you how much you spend on entertainment or monthly subscriptions, even things you might be subscribed to that you’ve forgotten about. This is not a sponsored ad for them; I only believe that they offer an excellent service worth checking out.
Increase Your Earnings
One great way to save is not to save but to earn more. Not only can you increase your earnings by asking for a raise, but you can also do this by engaging in a side hustle. Getting a side job is easier to wrap their heads around than changing their lifestyle for some people. It’s okay if you’re one of those people who are unwilling to give up their Starbucks, gym membership, or eating out. For you, cutting out a thousand dollars a month to make a pretty quick sprint, short saving might feel impossible, but the idea of earning an extra $250 a week might not seem so unreasonable. You can decide to pick up a shift of Uber or Lyft. You can sign up to drive for amazon.
You might also decide to learn a skill online. You could become a mobile notary, write blogs for people, join Upwork. You could do some telemarketing, which is a lot easier than people think; there’s this stigma that telemarketing is scary. There are many ways you can earn a hundred dollars weekly without really spending all much time. Hence, if you don’t mind skipping some of that Netflix and chill time to work online on a few things, you could earn some decent side cash. In the end, you’re going to have a home to show off for it – a cool win.
Buying a house is not necessarily a straight path. It’s not always by saving money, getting a job, or having friends and family help you with the down payment.
You can get creative about this. Allow me to share an example. One of my friends used to do a weekly get-together with many people where they would make sack lunches for homeless people. They would put together peanut butter, jelly, chips, vegetables, and a bottle of water. They’d make these lunches for hundreds of homeless people. It was a little weekly thing, and it started to grow well. He did it all out of his apartment and it just kept growing. He had so many volunteers and everybody chipped in for the lunches. He got so popular as the guy that made these lunches for people.
One day, he came to me for advice as he wanted to buy a house. I reminded him of the great community of people who came to his apartment every week. He didn’t need that much or a 3% and a 3½% down payment. He had a few thousand saved up. So I told him to start a GoFundMe campaign or something similar, like a Kickstarter, where he would ask those he had inspired to donate to help him buy a house. His landlord was already giving him trouble because it got to be a little bit too big and packed in his apartment. Guess what? He was able to raise several thousand dollars, and he was able to buy his house out of the goodness of people’s hearts that he had been inspiring.
He still makes lunches for people every week and everybody loves him. So not surprisingly, when it was time for him to ask for help, he needed a little push because he was too humble to ask for it. But once he did, people were ready to give. He received small donations from everyone and he was able to buy his house.
Hence, you can get creative; think about what you’ve provided for people around you or your communities. If there’s a special thing you do, perhaps you’re a songwriter, maybe you could sell songs on Fiverr or sell songs as an award on GoFundMe.
In certain areas of the country, getting a few thousand dollars might not be as hard as you think. If you have a wide enough net, you can get $50 or $100 from different people. You can get creative with getting the down payment and closing costs together for a house.
As I mentioned earlier, knowing exactly how much you can afford based on your income and debt is the first part of the process. You also want to know how much you can afford to pay every month. So if you don’t know how to do this yet, make sure to click on the next video to get a clear understanding of how much you can afford to buy.