This is part 1 of a 2 part article on saving for your dream home this year.
A new year brings a new set of goals, dreams, and resolutions. 2017 might be the year where you have “save for my dream home“ on that list. Making the commitment to be in a new home by the end of the year is a wonderful decision, but as you know, it's also a huge commitment that requires planning, saving, and spending. It might be overwhelming at first, even seeming impossible. Start by thinking small: focusing on quarterly goals instead of year-end goals will split the planning into smaller, manageable chunks. Here, we cover steps you need to take in the first quarter, which involves taking action to prep your bank and savings account. Begin with these five things:
Know the costs.
Educate yourself. Study the market, mortgage rates, closing costs, typical expenses. Don't let yourself fall privy to one of the ten mistakes that most homebuyers make. Most importantly, learn how much you will need to start saving. A good goal is to save for 20% of the home's purchase price. This can be used later as your down payment. Planning for a 20% down payment will allow you better options for mortgage and interest rates.
Check your credit.
In addition to planning to save for a down payment, know your credit score inside and out. Your ability to borrow is largely dependent on your score, so now is the time to make sure you will have the score you need for the mortgage rate you desire. Get in the habit of checking your score every month (there are free credit score websites that won't negatively affect your score, such as CreditKarma.com). If need be, plan to start raising your score. Extra payments, higher lines of credit, and reducing your interest rate can all improve your score. A good rule is to use 30% or less of your available credit on each card - plan now in this first quarter to stay under that number.
Open a savings account.
After planning for a down payment and knowing your credit score, another major thing you should do in this quarter is open a savings account just for your down payment fund. You will stay organized throughout the year if you have a separate account with a specific purpose and goal in mind. For more peace of mind, set up an automatic transfer from your checking to savings. An automatic transfer will take that extra money out of sight, meaning you won't be tempted to spend it.
Stick to a budget.
How much to move from checking to savings? Ah, yes, the final piece of the puzzle is to establish (and stick to) a budget. Creating a budget is crucial to keeping a healthy credit and steadily growing savings so you can meet your goal by year's end. There are many tips to creating a budget, but most importantly, create a line between what is necessary and what is not. Rent, bills, loan payments – necessary. Spontaneous trips and lavish meals out? Maybe not as necessary – at least, not while you're saving to buy a home. Once you pin down what's left over each month after necessities, figure out how much of that needs to go into savings each month to reach your 20% down payment goal.
A 20% down payment goal might be quite high; it usually means a few thousand of dollars a month just into savings, which is often more than most can afford. This is where a budget is crucial. It will show you whether you actually can afford that dream house you've been having your eye on, or whether it will stay in your dreams. Taking a cold, hard look at your finances this quarter and making a plan – by getting educated, knowing your credit score, opening a savings, and creating a budget – is the first step into making your dream of home ownership a reality.
Stay tuned next week for part 2 of our article, which covers tips to help keep up with your plan year-long. Follow the AvantSF blog every week for more insight on buying, selling, home decorating, and more.