Home · June 22, 2020

Make Saving for a Down Payment a Reality

Many of us dream of walking through the doorway of a home we can call our own. However, if you're juggling paying off debts, saving for retirement and managing bills, devoting extra funds toward saving for a down payment can seem daunting.

With some smart planning, it's possible to make buying your first home a reality while handling your other financial responsibilities.


Deciding on a home cost

Before you can make a savings plan for your new home, you'll need to figure out how much you need to save. First off, research how much you can afford.

The 28/36 rule is a common-sense recommendation that many financial experts agree on. Ideally, your housing costs should be 28% or less of your net monthly income (the amount of money that hits your bank each month). Meanwhile, your total debt—including your mortgage, student loans and car payments—should be 36% or less of this amount. So, if your monthly take-home pay is about $4,000, the 28/36 rule recommends aiming for monthly mortgage payments of around $1,120. From here, you can reverse-engineer a total home cost range based on the current rates in your area.

If you determine that your monthly budget can afford a $250,000 home, but your area is full of $350,000 homes, don't panic. The 28/36 is a guideline to help you realize that you might need to save more money and decrease your debt load before entering the mortgage process.

How much down payment do you really need?

Once you find your target home price, you can figure out a down payment. Putting 20% down on a home typically makes you look better in the eyes of a lender. You may possibly enjoy a lower interest rate and lower monthly mortgage payments with a bigger down payment upfront.

But saving 20% down can be an overwhelming task, especially if you're interested in a higher-priced housing market and are balancing student loans and rent payments. Many lenders have options that require less than 20% down. If you're a first-time homebuyer, consider Federal Housing Administration loan options in your state, most often called FHA loans for short. These loans require qualified buyers to put 3.5% down instead of the typical 20%.

Many lenders offer specialized down-payment assistance programs for first-time homebuyers, military and public service workers, such as teachers and healthcare workers. Each lender has its own set of rules and eligibility requirements. It's a good idea to get more information from potential lenders now, even if you're still not sure whether you're ready to enter the housing market.

Other home buying costs

A down payment isn't the only savings you'll need to put aside. Closing costs can add 2% to 5% on top of the price of your home, and they can vary depending on location, seller and lender. Here are a few examples of other potential fees.

  • Application fee: This covers the cost to process your application and varies by lender. Some lenders may waive the fee.
  • Realtor fees: Commissions for the real estate agent selling the home typically hover around 6% of the home price. Many sellers pay this fee out of proceeds of the sale, but it's worth asking how this cost will be handled.
  • Appraisal: An appraisal company inspects the house and gives a fair market value for the home.
  • Home inspection: This is a crucial step you don't want to skip. The home inspection is a non-biased report of the condition of the home.
  • Homeowners insurance: This expense may be rolled into your mortgage, or you might pay the first year at closing.
  • Private mortgage insurance (PMI): If you don't put 20% down, you might have to pay PMI, a form of insurance that protects the lender in the event that you default on the loan.
  • Underwriting fee: You may need to cover the cost for an underwriter's research to determine your eligibility to purchase the home.

Make saving for a down payment possible

Now you should have a concrete savings goal for your home purchase. From here, break down your savings goal by your desired goal end date. For example, if you want to save $25,000 in five years, you'll need to set aside about $417 a month.

You may need to adjust your current monthly budget or increase your monthly take-home pay to meet this goal. This might mean making some changes while you undertake this project. You could look at switching to a car with a lower monthly payment or working a few extra hours of overtime each week. Keeping your eyes on the end goal of owning your own home will make those changes feel well worth the effort.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.