Title says it all, but I'm looking for a five year plan. How can I save enough for a down payment? And what other things can I do, over these next five years, to prepare me (credit score improvement, etc.)?
Give it to me straight Team.
(oh, and some related details: credit score sits at 760, I have literally no debt at the moment, I can't imagine buying a $1M home so let's assume the down payment will be south of $100K, I'm 32 years old, and I've got a grad degree)
Rule number one - Live below your means. If that means beans and rice for lunch and rice and beans for supper, then that's what it is.
Step 1 - $1000 in the bank as an emergency fund. An emergency is defined as, "If I don't spend this money in my emergency account, my next meal comes from the dumpster behind McDonald's"
Step 2 - Pay off all existing debt. All of it. Every penny. List your debts from smallest to largest. The interest rate on that debt *does* *not* *matter*. Throw every spare penny at the smallest debt, and make minimum payments on all others. Once that smallest debt is paid off, work on the next debt, which is now your "new" smallest debt. Add what you're not paying on the debt you just paid off, to the minimum payment on your "new" smallest debt, and knock it out. You'll find in no time (commonly less than three years) you'll have no debt at all.
Step 3 - After paying off that final debt, continue to "pay that bill" each month to yourself, by putting it in savings. First, build up your emergency fund at this point to 3-6 months of living expenses.
Step 4 - You will need at an absolute minimum, 15% down to buy a house. More commonly it will be 20%. So if you're looking to buy a $100,000 house, (not unrealistic any many areas of the country) then you need to save at least $30,000. Why 30%? Easy. If you put 15%-20% down, that leaves you $10K to "move in". There's more to buying your first home besides the down payment. You're gonna spend some serious money making your new home move-in ready. First order of business is curtains. Then you need furniture. You have to pay deposits to the electric, water, gas, etc. I can tell you for a fact that the "first run" to the grocery store to stock the kitchen will cost you no less than $500. YOu need plates, pots, pans, cooking utensils, silverware, etc. That's just the kitchen. In the bedroom you need more than a bed and curtains for the windows. You need pillows, linens, a place to store your cloths, coat hangers for the closet, picture hangers for those pictures you want to hang on the wall. Basically, you can see how easy it is to justify $10K to set up a new house and move into it. If you're married, then you can double that amount. If you have kids, triple it.
Now I've barely touched the tip of this iceberg. So I encourage you to talk to other homeowners about their first time experiences. Ask them what they would have done differently, if they had known or realized it at the time that they could have done things differently. So learn from the "shoulda, coulda, woulda" experience of others, as much as you possibly can. There's no such thing as to much knowledge.
Most importantly, when it comes down to the wire and you're seriously ready to buy, it's a scary feeling that first time. But follow your gut instincts and you'll come out ahead. If it doesn't "feel right", then most likely it isn't right. Do what makes you feel good, not what makes you look good. Feelings last forever. Looks, not so much.
What Carl said is pretty good advice, a couple of things that might help you plan is know where you want to buy and find out how much homes in that area typically sell for now and what they are estimated to cost in 5 years. I'm in a similar situation, except I'm wanting to buy now and I've been looking for a home in my area and I'm find out that the price is way higher than what it was 5 years ago. Also research what home buying assistance program are available in your area to find out what they offer as well as requirements, especially if you are a first time buyer. Some lenders may have programs that only require 3% verses 20% down payment at closing. But, basically you just want to start putting money into a saving that you don't have easy access to, so you won't be tempted to spend and see if your employer has any programs that will match what you will put into a savings. Hope this helps and good luck on exceeding your goals!
It's kinda humorous sometimes, the folks I talk with looking to buy their first house. Usually newly married couples. They say they'll be fine with the down payment in the bank, and don't need anything extra. They "justify" it with the fact that they'll be using the furniture they already own, that's in the house they're now renting and that "friends" will be helping them move and relocate to the newly purchased house. Then I remind them of a few things.
- The curtains you have will not fit all the windows in your new house. Curtains aren't cheap, and the wife doesn't care about the cost either. She's not going to tolerate those piss green curtains in "ANY" room, and especially not *her* bathroom.
- Those "friends" who helped you move? They're expecting to be invited to the house warming party the next weekend. While they may not get steak and lobster, there damn well better be beer!
For deposit, you can definitely go down to 3%. There are conventional loans and FHA loans that allow that. For all deposits under 20%, You will have to pay private mortgage insurance which will be added to your monthly payments and you will also have an escrow account which will hold your taxes and home insurance too.
For now, you need to create a budget so you know where your money is going. In your budget set aside money for emergencies and also money for the new home. Two sites I have used their tools are Iwasbrokeandnowimnot and EveryDollar. Simple things like if you get a bonus rather than spending it, put aside would help. Also depending on how you get paid, if biweekly for example, you get two extra paycheck a year, you can choose to put that aside. With a budget, every thing you do not spend, allocate to your home fund.
Clearing your debt is important so follow the advice from one of the other posters here. If you want to incur any new debt, like buying a car, do it now. The closer you are to the end of the five year the less new debt you should incur.
When it comes to mortgages, one thing I’ve learnt is not to make hard inquiries when shopping around, it can seriously affect your score. You are only allowed soft inquiries.
Sites like credit karma and credit sesame can help you monitor you credit score. Your credit card could also have credit monitoring service, use them.
Apart from down payment, you are also saving for closing costs which can be up to 6% of your loan amount. While you may be able to finance some of these and have a seller pay for some of it, saving for this can provide you with breathing room.
You can also go and get a 5 year bind so that you cant touch the money until your ready to by the house.
$50 in a savings account per week. That is $2600 per year. In 5 years that's a 13,000 down payment. And BTW there is a program for First Time home Buyers where you take a class and you are not required a down payment. That's what I did and I have owned my own home since I was 24. Good Luck.
I know this post is kind of old, but I just wanted to add in there just in case you still are looking for advice or if other people look by.....
You should look into first-time homebuyer incentives in the area. Many are income based, so you might not qualify, but some places have incentives for buying in certain areas. Also, if you're interested in buying in a rural area you can put 0% down on a USDA rural loan. Just things to consider and look into 🙂 I just purchased my home in July of 2018 and got $500 back at closing because I used a first time homeowners incentive and also got the seller to pay $2k of the closing costs. It worked out well for me!
Here are the elements to get you the best interest rate: a) FICO 740 or above, b) Debt to Income (DTI) less than 50%, c) no derogatory items on your credit report, d) being a full-time employee in the same line of work with no gaps for at least 2 years with stable or increasing annual income.
There are loan products that allow as little as 3% down for first time home buyers. As mentioned before, mortgage insurance (MI or PMI) is required (either borrower paid or lender paid) for loan to values (LTV) greater than 80%, typically. If PMI is lender paid, it results in a slightly higher interest rate but you do not see an actually monthly line item for that cost; it also means you pay for it the entire term of the loan rather than being able to cancel PMI once your LTV reaches 78% of the initial purchase price.
Keep in mind that on top of a down payment you will have other closing costs and fees to cover, such as: appraisal, home inspections, title, escrow reserves, pre-pays for home insurance and interest. If the home you are looking at has mandatory HOA dues, those will need to be factored in to your overall monthly payment too.
Don't think you are looking for the home you will retire in as your first home purchase. You are looking for a starter home to stay in less than 10 years, typically. Good luck!