If you've decided to purchase a home but you're not saving now, starting with budgeting 101 is necessary no matter your income or spending style. Hundreds of Web sites, books and classes provide budget tools for starting the process, and if you're ready for this first step, you can probably find a local organization that ties budgeting to home buying. Getting specific with spending, savings and security will only strengthen your chance of succeeding as a homeowner and you can start now, while still renting, to get ready to commit to a place of your own.
At minimum, finding a home you want to buy and starting the process will involve up-front costs for real estate agents or lawyers, mortgage applications and home inspections, to name just a few smaller charges, and at the high end, a 20 percent or more down-payment [source: Kiplinger's]. As the end of the deal nears, costs for closing on the sale, moving, and starting utilities and insurance will add up, in addition to a long trail of other charges along the way. If you're approved for a loan within your range, or debt-to-income ratio, you may be getting what seems to be a great deal for your "money," but planning for the other expenses of being a homeowner should make you reconsider taking out a loan that will leave you just eking out the payments each month.
Looking at your spending style and budget and seeing that there isn't much of a nest egg, you may still want to forge ahead and catch up later, and there are plenty of ways to do that, but at a cost. Buyers without down payments can finance them at a high or fluctuating interest rate, and they can expect to pay additional fees for mortgage insurance to protect the lender if they default [source: Kiplinger's]. Those who already have 20 percent equity in their houses might be less likely to walk away.
Getting the mortgage itself usually involves solid credit scores and a history of responsible debt repayment, but if you lack either of these, loans are still available -- but again with very high interest and fees. Taking several months or years to clean up credit and save for a down payment can save you thousands and thousands of dollars over the term of a mortgage. And even if you save for the initial home buying costs and down payment, having a cushion of savings for the unexpected costs can protect you from missing principal payments should something unexpected happen.
With 2.9 million homes foreclosed on in 2010, it's likely that many didn't foresee falling behind in the first place, and whether the economy or personal factors come to play, savings can save a house in time of need [source: RealtyTrac].
Looking at the average gap between losing a job and finding a new one, average costs for extended hospital stays, and even more grim statistics about not being able to find work or losing a spouse are real-world preparations for how many months living expenses you should have on hand just in case. Having children adds monthly expenses you might not have considered when looking for a home, and going from a two-income to single-income household is another. Even if all is well with your family and income, unexpected weather damage or home maintenance will require, well, immediate cash.
None of this sounds particularly fun and savings is less than exciting or easy after you move. Knowing how much to save isn't really a matter of plugging in numbers and hitting a magic balance to achieve, it's more about having enough so that you actually enjoy owning a home and can sleep at night through financial and potential life crises. Some may want a full year of living expenses saved up for emergencies, and others are completely at ease with three month's worth. Many young families start off knowing their family and friends are there if they are ever in need, while others may have little or no outside help.
Starting with a budget, questioning everyone you know about what cash they've had to come up with on the fly, and reviewing expert after expert source for tips and readiness will build stores of knowledge for growing savings and home buying confidence, which most buyers will need a lot of even in a housing boom, not to mention a housing bust.
More information to add to your homing instincts follows on the next page.
- Bankrate.com. "How Much House Can You Buy?" 2011. (April1, 2011)http://www.bankrate.com/finance/mortgages/how-much-house-can-you-buy--1.aspx
- CNN Money.com. "How Much Home Can You Afford?" 2011. (March 31, 2011)http://cgi.money.cnn.com/tools/houseafford/houseafford.html
- CNN Money.com. "Money 101 Lesson 8: Buying a Home, Getting the Money Right." 2011. (April 1, 2011)
- FHA.com. "FHA Mortgage Calculator: How Much Can I Afford?" 2011. (March 25, 2011)http://www.fha.com/calculator_afford.cfm
- Kiplinger's Personal Finance Magazine. "Why You Need a Home Down Payment." Money Central, MSN.com. 2011. (April 1, 2011)http://articles.moneycentral.msn.com/Banking/HomeFinancing/WhyYouNeedAHomeDownPayment.aspx
- Lundin, Diana. "10 Things You Shouldn't Do Before Buying a Home." REALTOR.com. 2011. (April 2, 2011)http://www.realtor.com/home-finance/mortgages/10-things-you-shouldnt-do-before-buying-a-home.aspx
- RealtyTrac.com. "Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December." Jan. 12, 2011. (April 4, 2011)http://www.realtytrac.com/content/foreclosure-market-report/record-29-million-us-properties-receive-foreclosure-filings-in-2010-despite-30-month-low-in-december-6309
- U.S. Department of Housing and Urban Development (HUD). "Buying a Home." HUD.gov. 2011. (April 1, 2011)http://portal.hud.gov/hudportal/HUD?src=/topics/buying_a_home
- U.S. Department of Housing and Urban Development (HUD). "Common Questions from First-time Homebuyers." Oct. 26, 2009. (April 1, 2011)http://www.hud.gov/buying/comq.cfm
- U.S. Department of Housing and Urban Development (HUD). "Local Homebuying Programs." Jan. 28, 2009. (April 1, 2011)http://www.hud.gov/buying/localbuying.cfm