Saving for Homebuying

Saving is the most important step in buying a home, it requires careful planning, budgeting and discipline.

How to start saving:

In addition to using various online budgeting tools, in order to save, you have to have a firm understanding of your monthly income and your monthly expenses. Once you understand these, create a budget and only spend within your budget.

Creating a budget

Here are some useful steps to take to create a budget:

• List all your monthly expenses that do not change, such as your car payment, rent, healthcare, etc.
• List your monthly expenses that do change such as food/groceries, clothing etc.
• Carefully look through your monthly credit card and banking transactions to get a clear understanding of your spending patterns.
• List your discretionary spending items on a separate list, such as entertainment, dining etc.

The above exercise will help you to see where you can cut back in spending to help you save more.

Here is a link to an online budgeting tool: https://files.consumerfinance.gov/f/documents/cfpb_well-being_spending-tracker.pdf

How much money do you need to save for a down payment?

It can vary. Some mortgage lenders require as little as 3% of the purchase price if the buyer meets certain credit and income criteria. Many states and federal programs offer down payment assistance programs. Click the link below for more information on some of these programs:

https://downpaymentresource.com/

What is Debt-to-Income ratio?

Your Debt-to-Income ratio (DTI) is the amount of monthly debt you have (credit card, car, housing etc.) versus your total monthly income

Why is my debt-to-income ratio important?

Lenders use your debt-to-income ratio to determine whether will have trouble making your monthly payments. DTI is an important factor in determining one’s ability to purchase a home.

Lenders generally require your DTI to be below 42%. Generally, the lower your DTI the better. Having a good DTI can help you to get a lower interest rate on a mortgage.

How can I improve my DTI?

• Avoid any unnecessary purchases that can add to your debt
• Thoroughly review your credit report to understand your credit usage
• Revisit your budget and look for additional ways to cut spending and use that money to pay off debt

Other costs to save for when buying a home:

Closing costs

Closing costs include various fees associated with buying a home and obtaining a mortgage. These include application costs, lending fees, recording fees, title insurance fees, property taxes, homeowners insurance and mortgage insurance.

Closing costs can range between 2% and 5% of the purchase price. In some cases, the seller can pay some of the closing costs.

Homeowners Insurance

Homeowners insurance covers the physical structure that is your home and the physical items in your home and your property in the event of a loss, damage or theft. In some cases, homeowners insurance helps to cover repairs and replacement.

Mortgage Insurance

Mortgage insurance protects the lender in the event the buyer stops making monthly mortgage payments. Mortgage insurance is paid in addition to the monthly mortgage payment. It is usually required when the buyer’s down payment is less than 20% of the purchase price.

Other Costs to Consider

• Moving costs
• Utility installation fees
• Home furnishings
• Home improvements and repairs