Most people dream of owning their own house, but saving the money needed for your dream home can feel daunting. The rising cost of housing is hampering the market, and buying a home requires careful financial planning. However, first-time home buyers have multiple resources available to help guide them through this dynamic process.
1. The Important Decisions
If you’re in the market for a new home, a well-crafted financial plan and a decent down payment are vital. Below are some strategies to help you secure your first home without breaking the bank.
How to Create a Comprehensive Household Budget
To create a household budget, calculate your monthly income after taxes, then match it to your monthly expenses. You should have a surplus every month (although 64 percent of Americans live paycheck to paycheck). If you don’t have enough to set aside savings each month, work through your budget to see if there are items you can cut back on and add more to your savings.
As part of your budgeting process, determine what your target amount is for a down payment. Start by looking online to see what housing prices look like in your area.
How to Determine the Down Payment
A down payment is proportionate to the cost of a home. In a perfect world, homeowners are able to pay 20 percent as a down payment. This is the amount lenders prefer because it gives them leverage if you can’t pay your mortgage. If you’re committed to putting down 20 percent, your down payment funds will determine the maximum amount you’re able to spend.
A 20 percent down payment also saves you from having to purchase an insurance policy to protect the bank in the event of a foreclosure. If you have the financial means, aim for this amount while building up your savings.
2. The Alternatives
Certain types of mortgages cater to specific consumers in unique circumstances, and it may be worth considering the following alternatives:
Federal Housing Administration (FHA) Loan
A Federal Housing Administration (FHA) loan, for example, is a loan product that tends to be popular with first-time home buyers due to the lower income limits and other requirements for this type of mortgage. These loans, which are insured by the FHA, provide low- to moderate-income borrowers with loans that make home ownership more accessible—even if you have less-than-perfect credit. These loans also offer a minimum down payment as low as 3.5 percent of the home’s value.
Military Veteran Loans
If you’re a military veteran, you may qualify for special Veterans Affairs loans or grants that offer exclusive rates and terms on mortgages. These assistance programs even include mortgage products that require no down payment whatsoever.
Assistance Programs for First-Time Home Buyers in Missouri
The Missouri First-Time Homebuyer Savings Account was created for first-time home buyers to help them save for a new home. The initiative allows you to deposit up to $1,600 per person (or $3,200 for couples) of after-tax dollars annually and receive 50 percent off your state taxes on the amount deposited. All accrued interest on the account is tax-free to help save for a down payment. Parents and grandparents also can set up an account for their children and grandchildren.
3. The Other Considerations
The closer you’re able to come to a 20 percent down payment, the better your mortgage repayment options will be. But if you can’t hit that mark, try not to worry. Many lenders offer flexibility to help you finance your home purchase.
Paying for Private Mortgage Insurance (PMI)
Although it’s possible to purchase a home with a conventional loan with less than 20 percent down, consider the necessary added cost of private mortgage insurance (PMI).
PMI is a safeguard used to protect lenders in the event the purchaser can’t pay their mortgage. Instead of using the down payment as leverage, homeowners purchase an insurance policy that will compensate the bank if you foreclose on your loan.
PMI is added to the mortgage until the equity in the home surpasses 20 percent, at which point the insurance is removed. Homeowners achieve this by making regular monthly payments, making improvements to the home, or experiencing an increase in the home’s assessed value.
Making the Most of Your Money
As you accumulate money for a down payment, you need a safe place to store your savings and leverage that money. Play it safe—avoid risky investments and stick with a reliable, interest-bearing savings account or money market account. Investments might be attractive, but they seldom pay off in the short term and may result in a serious loss. They also aren’t insured, unlike a bank account.
Once you have your savings account set up, start setting aside cash for the down payment. One of the easiest ways to save is by cutting down on your expenses. Use the household budget you developed to identify needless expenses you can possibly reduce.
Even if it seems impossible, seriously consider buying a home rather than paying rent. Especially as a first-time home buyer, the advantages are worth the cost. A few benefits of buying over renting include:
- Gaining tax advantages
- Possessing the pride of home ownership
- Having home improvement customization potential
- Acquiring an asset with appreciating value
4. The Reliable Partner
If you are getting ready to buy a house, be sure to partner with a bank you can trust and discuss viable mortgage options. The most important step is choosing a home that fits your family’s needs and your personal preferences. You can learn more about the ins and outs of home buying by checking out our e-book, The Essential Guide for First-Time Home Buyers.
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