So you’ve decided you want to be a home owner. You’ve looked at some pictures, maybe talked with an agent, and you’re ready to go! The problem here, is especially with the world’s financial situation, nobody wants to lend money to someone who cannot put up a deposit (a down payment) for their home loan. Face it, would you want to lend money to someone who hasn’t managed any significant savings?
By providing a solid down payment for your new home, you prove to lenders that you are serious about buying a house, that you are responsible with money, and that you have thought ahead enough to have the cash on hand for your deposit. Banks and lenders also give better terms, payments, and interest rates to borrowers with more down-payment cash.
To be entirely honest, saving up a deposit is hard work. You’ve got to face the fact that it’s not going to be an easy road. If you really want to buy your own home, you’ve got to put a lot of work into developing a solid budget and savings plan. Sticking with it can be hard, but in the end, it’s all worth while.
First off, it’s time for a little number crunching. The very first thing you need to do is decide what price range you are looking at. An online mortgage calculator can be very helpful in determining what payment corresponds with what purchase price. Ideally, your monthly payment should be less than 30% or 35% of your monthly take home pay. Of course, you want to choose the most affordable option that fits within your budget range and gives you the features you are looking for.
Now, you need to decide how much of a down payment you want to put on your house. The more you put down, the less your monthly payment will be. Though it will be harder in the short term to save up more, you will pay much less in the long run, since your monthly payment will be significantly lower, and you won’t pay as much interest, since the amount you borrow will be less.
Lenders are also much more likely to lend to you if you have a larger down payment. It used to be that just about anyone could borrow at 0% down. Not anymore! If you have 10%, 15% or even 20% to put down, you’re at a much better advantage.
Now that you know how much you need to save up, it’s time to make a budget. Add up every single monthly expense you have - don’t forget to account for the hidden expenses, like eating out, seeing movies, buying gas, haircuts, and any other expense you may not think of immediately.
Now, subtract your total monthly expenses from your total monthly take-home pay (your income after taxes) to give you your “spare income” figure. Now, most people make it very difficult on themselves by not giving themselves breathing room. Let’s face it, things come up. Sometimes you want to go on a fancy date, sometimes you see a pair of jeans you really want, and other times you just want to treat yourself to something nice. Now, you have to be strict to your budget, but giving yourself even an extra 40 bucks a month in spending money can help make things a lot easier. If you don’t end up spending it, just toss it into savings as well.
Take the amount you wish to save each month, and write it on the calendar, on the 1st. Now, pay your “savings bill” just like you would rent or an electric payment. Immediately transfer that money into savings on the first of each month, and you will have your down payment before you know it!