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How to Save Up for Your Dream House


Calculate How Much You Need to Buy a House and Set Your Goals


“What’s your price range?” is one of the many loaded questions you’ll face as a prospective homebuyer. As you sit across the table from your mortgage lender one day in the future, you should be confident in your response.


That’s right, you can—and should— do some major budgeting legwork before a lender ever looks at your finances. It starts with setting financial goals that will support your decision to buy a house, which is both an immediate expense and long-term commitment. With specific milestones in mind, you won’t buy a house before you’re ready or go into the process blind to the costs of homeownership.


“Buying a home is one of the most stressful things that anyone will go through and will probably be the most expensive thing you’ll buy in your life,” says Deborah Smith, a top real estate agent who ranks in the top 5% of agents in Southfield, Michigan.


Before her buyers go all in, she reminds them of how big of a financial commitment a home purchase is.

“I educate my buyers on being realistic about owning a home and what the cost will be like,” she says. For such a momentous purchase, you’ll want to make sure that you do it right.


Let’s walk through how to:


ƒ Figure out how much you can spend on a mortgage every month

ƒ Calculate what you’ll need for a down payment

ƒ Budget for closing costs ƒ Improve your credit score

ƒ Plan for recurring expenses like taxes, maintenance, and insurance

ƒ Protect your emergency fund


We’ll take it slow, step by step.


How to determine your maximum monthly mortgage payment


When you get preapproved for a mortgage, a lender will look at many factors (your credit history and overall financial profile) to determine how big of loan you qualify for. The underwriting process is complex, but generally lenders prefer that when you take on a mortgage, your debt-to-income ratio doesn’t exceed 43%.


That means the slice of your gross monthly income you put toward any kind of debt, whether it be a mortgage, car payment, or student loans, likely will get capped at 43% of your pre-tax income when you go to buy a house.


It’s a good standard to be aware of. However, depending on your circumstances, the 43% mark can actually put you out of your comfort zone financially. A lender won’t factor in, for example, how much you spend on daycare every month or whether you’re helping your younger sister pay for college textbooks, notes millennial-focused magazine Mental Floss. On the other hand, without a ton of extra expenses, a 43% DTI could be just fine.


As far as what a middle-of-the-road buyer pays, Americans on average spent $1,443 on monthly housing costs such as their mortgage in 2018, according to a study by NerdWallet. Moreover, the Bureau of Labor Statistics found that Americans typically put 37% of their budget toward housing costs.



As of April 2019, the average listing price for homes in the U.S. is close to $300,000, which translates to an average $1,383 in mortgage payments (for 20% down and a fixed 30- year loan term). Every market is different—median home prices hit $1.7 million in San Francisco, CA, whereas listing prices in Omaha, Nebraska average $235,000.


Wherever you settle down, a home is a huge financial commitment that sticks with you. The most common mortgage terms are 15 and 30 years, and people tend to stay in their homes for 13.3 years on average. Meanwhile, 88% of recent buyers financed on average 87% of their home purchase, suggesting that many Americans plan to pay off their homes over the long term.


It’s the biggest and longest IOU you may ever take on. Regardless of national averages and whatever your friend paid for a house, figure out a budget that works for you.


How much can you spend on a house each month?


Many first-time home buyers fail to consider what comes after the initial down payment on a house. Your mortgage bill and its related costs will arrive like clockwork in your mailbox each month and you don’t want to panic about how to make ends meet.


Follow this step by step to calculate a comfortable monthly mortgage payment:


1. Add up your income streams


First, add up every source of income that goes into your bank account. Include what you bring home, what your partner earns, and other steady sources of money.


Next, you’ll need to figure out how much of your budget you’d like to allocate to housing costs every month. The “30% standard” is one home affordability rule that’s stood the test of time. It states that your housing costs, including taxes and insurance, should account for no more than 30% of your gross income (meaning, your income before taxes).



The Joint Center for Housing Studies traced this rule back to the 80s when federal legislation increased the affordability standard to 30% for most federal housing assistance programs. The Research Center concluded that although the 30% rule is simplistic and should be taken in the context of an individual’s cost burdens and income level, as of 2018, the 30% standard remains valid as a general guideline.


Here’s how you can incorporate the 30% rule into your home budgeting plan:

 

Say you and your spouse take home a combined $4,200 every month before taxes. If you multiply 30% by this number (plug in 0.30 × 4,200 in your calculator), you’ll get $1,260. You know then that your monthly mortgage and housing expenses should not exceed $1,260.


That $1,260 should cover:


ƒ Mortgage principal and interest

ƒ Property taxes ƒ Homeowners insurance

ƒ Mortgage insurance (if applicable)

ƒ Homeowners association fees (if applicable)


Beware: most of these monthly payment estimates are based solely on an estimated principal and interest payment for a highly qualified borrower, and don’t account for other monthly costs. Fail to factor in property taxes and insurance and you could blow your budget, big time. Property taxes vary widely across the country, but the average American household spends $2,279, every year ($190 per month) on taxes for their home. Meanwhile the average homeowners insurance premium, which protects you in cases such as fires and theft, ranges from $600-$2,000 per year. These are no small expenses.


Additionally, if your down payment is less than 20%, and you’re taking out a conventional loan, then you’ll likely need to factor in private mortgage insurance. Homes in a private community, like a condominium, may also tack on HOA fees for those extra amenities and services.


2. Factor in your existing debts


Remember, most lenders recommend a maximum debt-to-income ratio of 43%. So from here, you’ll need to add up the amount you pay toward existing debts (like student loans and credit card balances), and divide that by your pre-tax income ($4,200 in our case).


If you’re taking out a conventional loan, any down payment that dips below 20% of the home’s value must be coupled with private mortgage insurance (PMI), an extra cost bundled into your mortgage payments every month


$4,200 (income) × 43% (DTI max) = $1,806 With an income of $4,200, your total debt should not exceed $1,806.


If you put 30%, or $1,260, of your income toward housing costs, that leaves $546 leftover to put toward other debts. If together your monthly debt payments exceed that cap, you’ll need to lower your monthly housing budget accordingly.


3. Aim high on your down payment (within reason)


Your down payment is what you pay out-of-pocket from your own savings at closing, and there’s a reason the phrase “20% down” rings in your head like an earworm: If you’re taking out a conventional loan, any down payment that dips below 20% of the home’s value must be coupled with private mortgage insurance (PMI), an extra cost bundled into your mortgage payments every month. (There are exceptions to this; for example, if you were to offset the down payment costs with a “piggyback” second mortgage which allows you to borrow additional amounts to supplement your down payment, you may be able to avoid PMI with a lower amount down). PMI protects the lender if you miss your mortgage payments, though it does not protect you as the buyer from foreclosure.


However, 20% down isn’t the only route at your disposal. According to a study by Country Financial, a reputable insurance company established in 1925 that serves more than a million U.S. homes, more than half of buyers surveyed in 2019 put down 10% or less, while one-third put down short of 5%.


What you put down depends on what you’re financially capable of, and the requirements vary based on the type of loan. For example:


ƒ FHA Loans, backed by the government: Minimum of 3.5% down payment required

ƒ VA Loans, backed by U.S. Department of Veteran Affairs: 0% down payment required

ƒ Conventional Loans (with PMI): Minimum 3% down payment

ƒ Conventional Loans (without PMI): Minimum 20% down payment

ƒ Jumbo Loans: 10% down payment



Dave Ramsey, one of the most well-respected personal finance experts in the industry, says that if you want debt-free homeownership, a 20% down payment is your best bet. For one, you can kick the PMI to the curb on a conventional loan with 20% down. (Note: There are . government-backed programs that allow for lower amounts down, but may also include their own form of mortgage insurance.)


In addition, a higher down payment will likely qualify you for a lower interest rate* (depending on other factors within your larger financial profile), which can mean big savings over time.


For example:

If you decide to buy a home for $250,000, with a 20% down payment, 3.5% interest rate on a 30-year fixed term, your monthly payments come out to around $1,231 give or take a few factors.


With a 10% down payment, that number jumps to $1,399.


You might think that $168 difference isn’t much. But, multiply that by 12 months in a year, that’s an extra $2,016 a year in payments. Two grand for 30 years? Add a whopping $60,480!


“All you’re doing is trading time for money and anytime you trade time for money, you’re going to pay more for whatever you’re buying,” says Mark Squire, financial expert and CEO of Wise Choices Financial.


He also explains that while the down payment is important, buyers need to stay on top of

every mortgage payment. Don’t push it to the limit with your down payment to the point where you’re left with barely any savings leftover. Stay within your means.


If you’re set on putting down 20% but the idea of it makes you feel shaky with any particular property, the solution is simple: Buy a cheaper house.


If you’re set on putting down 20% but the idea of it makes you feel shaky with any particular property, the solution is simple: Buy a cheaper house.


There’s another layer to this that’s important to note: For some buyers who live in markets where housing costs keep rising at a fast pace, it may make more financial sense to pull the trigger on a home purchase rather than spend more time saving to reach a certain down payment benchmark. Let’s say you spent 5 years saving up to put 20% down, but you live in Oakland, California, where home prices rose 5% year over year in June 2019. Home prices here could outpace the rate at which you save, and before you know it, you’re back to square one for the same house, but at a more expensive price.


Leave room for emergency funds

Financial advisors also recommend that you save 3 to 6 months of living expenses for an emergency fund, so that if doomsday does arrive in the form of a lay off or stock market crash, you can stay above water.

As an example, let’s stick to our monthly income of $4,200. Let’s say you use 50% of your income to pay for your living expenses. Three to six months of living expenses for your emergency funds would range from $6,300 to $12,600 in the bank.


Anticipate maintenance costs

Finally, don’t neglect your home maintenance budget. 44% of homeowners regret their home purchases, stating that home maintenance and other costs were much more expensive than expected. Bankrate.com, a top-rated online finance site, found in a survey that the average homeowner pays $2,000 every year on maintenance. This includes anything from faulty plumbing to landscape fixes that require upkeep.


Allocate at least 1%-2% of your home’s value toward home maintenance and repairs, so that you don’t empty your bank account to fix up a leaky roof after a rainstorm.


Don’t forget about closing costs

On top of the down payment, buyers are on the hook to pay closing costs.


Here’s an idea of the types of fees you can expect to be included in the final closing costs. (There are many more, and this is just a sampling. For a full list, review our comprehensive guide to closing costs and third-party fees for buyers.)


Loan application fees: Some banks and lenders charge buyers for the processing a new loan requests, which include credit checks and smaller administrative fees.

ƒ Loan Origination fee: Most lenders charge buyers for the evaluation and preparation of your loan. Buyers can expect to pay around 1 to 2% of the loan amount, but this fee can go all the way up to 3%. So a $200,000 loan may require a $4,000 loan origination fee.

ƒ Transfer taxes: You pay transfer taxes when the property changes hands from the seller to you. Transfer taxes are set by your state or local government, so what you end up paying depends on your city. Generally, you can expect transfer taxes to be a percentage of the sales price.

ƒ Recording fee: The government charges recording fees for the registration and recording of your real estate purchase into public record. Recording fees vary from city to city, so the cost depends on the rate your government charges. Expect to pay anywhere between $100 to a few thousand dollars. ƒ Property taxes: Property taxes are location-specific and buyers normally pay the taxes due after closing. But if the seller has already paid for the entire year, buyers will have to pay their prorated amount.

ƒ Title insurance and settlement fees: When you purchase your home, either you or the seller will select a settlement agent (often called a “escrow” or “title” agent, depending on where you live) who will be responsible for the closing of the purchase transaction and issuing title insurance. You have the right to shop for a settlement agent, but you can expect to pay anywhere from $300 to $1600 for settlement fees, plus additional amounts for owner’s and lender’s title insurance to protect you and the lender for errors in the title history of the property.”


You’ll also need to account for fees for the home appraisal and home inspections, which can either be paid upfront/per appointment or all at once at closing In total, buyer closing costs average anywhere from 2% to 5% of the final purchase price of your home. On the $250,000 house you want, you’ll likely pay an additional $5,000 to $12,500 for closing costs.


Set the right goals toward achieving homeownership

Now that you’ve done some important math, grab a pen and paper or your laptop (you’ll be 42% more likely to achieve your goals if you write them down). You and you alone are in the best position to know your life plans and financial situation.


Write down your North Star based on your calculations


As you save up for a home, you’ll need to be intentional about your end game.


This is what your setup may look like if you decide to put 20% down on a $250,000 house:


ƒ $50,000 for a 20% down payment goal +

ƒ $10,000, for ~4% closing costs +

ƒ $6,300 for emergency funds (three months of living expenses)


Added together, your bare minimum North Star amount should total $66,300. Let’s say you already have $10,000 in the bank. That lowers your savings goal to $56,300.


Work toward a higher credit score no lower than 580.


Let’s start with the good news: You don’t need a perfect credit score to buy a house. “Most of the time people think they need very high credit scores, a 700 or better. They don’t,” says Chris Zinn, a top real estate agent in Tulsa, Oklahoma. “There’s all kinds of loan programs out there for people with scores even in the high 500s.” If you’re strapped for time, you may still qualify for FHA loans with a credit score as low as 580, but you’ll need to commit to at least a 10% down payment.


Best case scenario, if you can set long-term goals, you can work to improve your credit score as you save up money for the down payment. Most lenders prefer home buyers with higher scores, which sets you up for better mortgage terms and lower interest rates.*


Here’s how you can try to raise your credit score:



1. Monitor your credit score for free.

You’re entitled to a full credit report at no cost from each of the three nationwide credit reporting companies—Experian, Equifax, and TransUnion—annually. You can order one online from annualcreditreport.com.


In addition, various online platforms will give you an estimate based on how well you pay off your debts. This doesn’t hurt your score either since you aren’t conducting a full-on investigation and background check into your financial history. Check out these platforms (which all come with mobile apps so you can check your credit on the go):


ƒ Credit Sesame: A strong option thanks to the company’s partnership with TransUnion, a highly reputable credit service with over 200 million users and 65,000 businesses. You get alerts every month that show you your progress and the service provides identity-theft insurance of up to $50,000.

ƒ Credit Karma: With Credit Karma, which is partnered with TransUnion and Equifax, a credit agency with more than 800 million users, you can monitor your credit score and analyze what’s affecting it, such as outstanding debt and too many hard inquiries. When the platform pulls your credit score, it also identifies areas for you to save money.


These tools are great for helping you track your credit as you save for a home. But remember, they are offering estimates, so the numbers they provide can’t be taken as gospel. When it comes time to take out your mortgage, it’s important to know your official credit score, as that’s the number lenders will look at.


2. Student debt? Car loans? Credit card bills? Pay. Them. Off.

Damian & Danielle Bruno, real estate power couple who are in the top 1% of agents in Sedona, Arizona, advise buyers to tackle debt head on.


“If you’re looking to buy a home, get that debt situation under control and pay it off,” says Damian. “Saving money while having debt is really counterproductive.”


Nobody expects aspiring homeowners to be debt-free in order to buy a home, but you should try your best to work toward that goal. Most lenders advise their clients to keep their debt-to-income ratio below 43%. If you have a higher ratio than 43% (more debt than income), lenders are less likely to approve you for a loan.


We’ll get into strategies on how to trim your debt in Chapter 3, but here are some tips to get started:


ƒ Live within your means: track your expenses and budget what you would spend every month.

ƒ Pay off your credit card bills in full and find a method for the rest of your larger debts, like medical bills or student loans.

ƒ Stay on top of your monthly dues and when you can, make extra payments to shave off time and interest.


3. Keep an overall healthy credit profile.

As you work toward buying a house, as a general rule, you want to minimize your overall debt and outstanding credit obligations. Decisions like opening a bunch of credit cards from your favorite retailers or taking on large car payments may prompt lenders to conduct a thorough background check on you. This will lower your credit score! With excessive payments and loans, you prove to lenders that you’re a credit risk.


On the flip side, some people may go through life without taking on any debt or opening any credit cards. This may seem great on its face, but it can actually be a problem. While lenders won’t make a loan to you if you carry too much debt, they also generally won’t make a loan to you when you don’t have any.


Most lenders will need to see at least 3 credit lines that have been established for at least 12 months, and at least 2 of those need to be active and open. So, don’t go nuts and shut down all of your credit lines, and if you’ve made it through life debt-free, it’s time to open a few low-balance credit cards and keep them open and paid down. That way, when it’s time to apply for a mortgage you’ll have the requisite active credit lines to establish a credit history, but no significant debt to affect your DTI.


4. Set a deadline for your savings


The best goals are measurable and time-specific. If your goal is to purchase a home, you should know how much you’d like to have in the bank when you get a mortgage. Then, set a hard deadline that will keep you accountable.


Bankrate.com has a savings calculator that helps you figure out how much you need to stow away every month to achieve the amount you want.


Bankrate.com has a savings calculator that helps you figure out how much you need to stow away every month to achieve the amount you want.


If you set yourself a deadline of 3 years and put your savings in an account with a 2% interest rate, you’ll need to save at least $1,502 every month to meet that goal. When you break it down like that, you don’t have to climb Mount Everest all at once. You can take it day by day, one step at a time.


Use HomeLight’s home affordability calculator to connect the dots


To get a clearer picture of what your payments and debt will look like with a home purchase, play around with HomeLight’s home affordability calculator. It takes into account factors such as your down payment, average interest rates* and different loan terms (the most common being the 15-year or 30-year mortgage).


Let’s run through a calculation using the HomeLight Home Affordability Calculator and our example from above:


1. First tell us your location. For illustrative purposes, let’s say you’re in a mid-tier housing market like Dallas, Texas. Not the cheapest, but not the most expensive, either.


2. Enter into the calculator what you’d earn annually (that’s $4,200 * 12 months), or $50,400.


3. Then, plug in your savings goal, in this case $66,300.


4. Next input how much of your savings you’d be willing to allocate toward the down payment (we’ll use 20%) and closing costs. To preserve your $6,300 safety cushion, you’d be able to put allocate $60,000. Type in your monthly obligations, such as student loans and car debts. For this example we put in $450, since it’s below that 43% DTI cap.


5. With an interest rate of 4% and a 30-year loan term, the home affordability calculator shows you that you’re able to buy a $246,869 home. Your monthly mortgage payments shake out to $1,356 including taxes and insurance.


6. Think back to our original 30% rule: you were trying to stay below $1,260 for your total housing costs. The calculator shows you you’d pay a smidge above that in this scenario. However, you can adjust your price range up or down from the calculator results based on your individual budget boundaries.


Phew, that was a lot of information at once! Are you still with us?

Before we get into the next chapters, which will cover your next steps to reduce spending, pay down debts, and implement key savings strategies, let’s review what’ve gone over so far.


Do a Budget Audit and Trim the Fat from Your Spending


You’ve calculated what you need to afford your dream home, but now the next step is to figure out how to reach your ultimate goal. You have two options: make more money or save what you already make. We all want a higher income or a climb up the career ladder, but these factors aren’t the easiest to control in your immediate timeline. So right now, focus on saving.

A recent Bankrate report found that Americans’ savings varies based on their household type and age. Singles without children under the age of 34 have about $2,730 in their savings account, whereas couples between the ages of 35 to 44 with children have $10,399 saved. The average household has around $8,863 saved up.

However, Bankrate also found that 1 in 5 working Americans don’t have a savings plan at all for retirement, emergencies or financial goals like buying a home. 20% of Americans set aside only 5% of their annual income for their savings. That’s typically not enough to buy a house.


“I encourage aspiring buyers to create a monthly budget and strictly adhere to that budget so they can pay into a savings account until they have the funds needed to purchase their home,” says Smith, our top agent from Scottsfield, Michigan. “Trim everyday expenses by doing simple things like bringing lunch to work instead of going out to eat everyday, and making your own coffee at home instead of buying coffee from your favorite coffeehouse every morning.”


Step away from the overpriced organic chai latte cafe and open up the calculator app. Time to apply some basic auditing math that we should’ve learned in high school instead of 10th grade trigonometry. Here’s how to audit your budget and set aside funds for your future home:


ƒ Create an expense sheet that lists what you spend every month


ƒ Break down your expenses into larger categories that you can track


ƒ Find ways to cut back spending in areas where you’re over-budget Let’s review each step in more detail.


"The first thing that I advise my young clients to do is to write down everything they spend for two weeks,” explains Mark Squires, President and CEO of Wise Choices Financial, LLC. And when he says everything, he means everything. A pack of gum, a cup of coffee, gas for the car, write it all down. “Most people don’t instinctively know how to control their money until they learn how to control themselves,” says Squires.

He emphasizes that it’s not a bad thing to spend money and a budget’s purpose isn’t to make you feel guilty. But if you want to buy a house and you just spent $240 this month on Netflix, HBO, FabFitFun, Blue Apron, and Amazon subscriptions, you might want to rethink your purchases. Overall, a budget provides self-awareness—a reality check.

Once you know what you’ve spent your money on, then you can start to shift dollars around. What you spend and what you save go hand-in-hand, and you need to figure out where you can save more and spend less.


If most of your purchases are through your debit or credit card, you can download your bank account statements to view line by line. Bank of America has statements in PDF format that you can download and Chase Bank lets you toggle to specific dates of the month you want to view.


Build a spending plan and live within your means

Go through your expenses and categorize them based on themes. Add up date nights and retail therapy into one category; ride shares and car expenses should go together in transportation.


Based on what Americans spend the most money on every month, we recommend separating your expense sheet into these five basic categories:


ƒ Housing: Rent and renter’s insurance

ƒ Utilities: Electricity, heat, phone, cable, internet and water

ƒ Food: Groceries and restaurant spending

ƒ Transportation: Car payment, car insurance, oil, subway/metro.

ƒ Personal entertainment: Clothing, movie nights, happy hours, vacations


From here, make two separate budget sheets: one for the most recent month of expenses and one for the next month. The expense sheet for the past month should show what you’ve already spent—consult that list you either wrote down or downloaded from your bank. The other sheet should be empty and have categories listed out: this becomes your spending plan for the next few months.


NerdWallet recommends the 50/30/20 budget rule. This formula aims to help you: ƒ Put 50% of your income to necessities like rent, insurance, food, anything you can’t live without. ƒ Allocate 30% toward expenses that you don’t absolutely need, like gym memberships and Friday date nights. ƒ Use the last 20% to build your savings or pay off debt.


Here’s an example of what that plan might look like based on the 50/30/20 rule. We calculated the budget based on what your gross income would look like. So, a $4,200 paycheck becomes $3,275 after taxes.


 

50/30/20 Rule: Budgeting guideline that divides income as follows 50% necessities 30% non-necessities 20% savings



Now, you can compare what you’ve spent in the previous month against what you should be spending and find areas where you’re clearly over-budget. From this budget, we can see that our homebuyer has spent over budget for those 50% must-haves. In the monthly expenses chart, they’ve spent about $500 for food and can cut down on the $200 on transportation.


They could switch over to a discount grocery store and look out for coupons; take fewer ride shares and make time for public transportation. If all this feels like a lot of budget micromanaging, know that it’s not for nothing: Almost 60% of Americans live paycheck to paycheck, according to a study by Charles Schwab.

However, when Americans create financial plans, they have more disciplined spending habits. 78% of planners pay their bills on time, while only 38% of non-planners stay on top of their payments. 74% of planners allocate a portion of their income toward savings.

Compare that with 25% of non-planners who don’t save from their income and don’t have an emergency fund. When you create a plan for your expenses, you’re more likely to feel financially stable overall and reach your homeownership goals faster.


Too many ‘treat yourself’ days? How to cut down on your spending


Now you know your spending habits, but how do you make sure you follow your plan for the coming months? We’ve listed a couple ways that you can trim what you spend in each category that can make it easier for you to follow your spending plan:


Housing

ƒ Find a roommate - If you’re on a budget, find another housemate who can split the cost of rent with you. That could be with your partner or with a friend who needs a place to stay. Let’s say your current rent in a two bedroom apartment is $1,800. Another person in the apartment would cut your housing expenses down to $900.

ƒ Move to the suburbs - Location determines the price of housing and how much you would pay for rent. While it’s desirable to live downtown, in the heart of the city, that’s typically the most expensive neighborhood to live in. For example, rent in Portland, Oregon averages $1,547 in a 766 square foot apartment. But, a less than 20 minute drive to the city of Cully, Oregon drops the rent price to $762.


Utilities

ƒ Don’t mess with the thermostat - The U.S. Department of Energy found that if you set your thermostat back 10 to 15 degrees for 8 hours a day, you can save up to 15% on your heating bill. An 8-hour work day can easily take care of this solution. Otherwise, you can also program your thermostat to a set temperature, so that you aren’t tempted to play with the numbers.

ƒ Shampoo, rinse, and stop - One easy way to cut down on water usage is to take shorter showers. When you cut down your showers to 4 minutes, you can save up to 5,840 gallons of water per year, or $100 from your water bill each year. Better for the environment and better for your budget.

ƒ Save energy, save money - When you switch out the filters for the AC and heater, you can save 5% to 15% on your energy bill. The average American spends about $3,000 on energy and the cost to change out your filters average $40 to $80 a year. When you change them out regularly, you can save up to $450.


Also, remember to flip the switch whenever you leave the room. Turn off the lights in the most-used places in the house (living room, kitchen, entryway) and you can save more than $44 a year.


Food

ƒ Meal prep 5 days of the week - The average American spends about $3,000 a year on restaurant dining. A prepped meal costs around $4 in comparison to a $13 dollar restaurant dish. If you eat out for lunch and dinner, 5 times a week, that’s already $130 spent on outside meals. But, if you prep all three meals in a day, 5 times a week, you already save $70 on food! ƒ Stick to your list! - We’ve all had that moment when we walk into Target to buy orange juice and come home with fuzzy socks, popsicles, and fake plants. You’ve easily flushed $50 down the drain. So, before you go out and splurge on things you don’t need, make a list of the absolute, essential food items you need to make your meals and stick to it!

ƒ Buy in bulk - Even if you’re grocery shopping for a household of two, try to buy in bulk for non-perishable items, like dry pasta and laundry detergent. When you buy toilet paper, something you always need more of, you can save up to 50% when you buy in bulk. Just don’t buy a case of 50 pastries that will spoil in a week.


Transportation

ƒ Set your max number of rides for Uber/Lyft - Set a limit of how many rideshares you take and how much you’ll spend in total. Track and visualize how much you’ve spent with an app called Pistat.io. It adds up your rideshare receipts and showed one journalist that he had spent more than $870 for just 265 miles. The results just might scare you out of calling an overpriced Lyft to work and force you to take the bus instead.

ƒ Catch the bus and save cash - The U.S. Department of Transportation estimates that you can save more than $10,000 when you opt for public transit over the car. You don’t have to worry about gas, auto repair, insurance, and you’ll help the environment along the way. Download public transit apps that show you timetables and schedules of your trains and buses. Then, you can plan your transit ahead of time.

ƒ Location pin the cheaper gas stations in your area - Sometimes public transportation and rideshares just don’t work out for your schedule or where you want to go. If you need to drive, download apps like GasBuddy, which locates the cheaper gas stations based on your location. For example, a station near the highway can charge $0.30 to $0.50 more per gallon than one in your neighborhood.


Personal entertainment

ƒ Hang out at home - Since you pay for rent anyway, invite friends over for a potluck and watch a Netflix movie instead of a night out. You don’t have to pay for $20 for a meal and $12 on a cocktail, and you’ll be in great company.

ƒ Share memberships - You can save a lot of money when you join family and friends accounts on your personal entertainment platforms like Spotify and Netflix. Spotify premium costs $9.99/month. But, if you share the account with 4 other people for $14.99/month, each person only pays $3/month. You can also save up to $60 or more a year when you share a Netflix account with friends and family.


Dealing With Debt: Smarter Ways to Pay Off What You Already Owe


Back in the 1700s, Benjamin Franklin wrote in an essay titled The Way to Wealth: “Rather go to bed supper less, than rise in debt.” We covered how to create a budget, which will help you keep your spending and savings in perspective.

Cutting down on your spending is a huge step toward your homeownership goals, but you won’t get very far if you’re weighed down with debt. Millions of Americans struggle with debt, particularly in these three categories:

ƒ Student loans As of March 2019, Americans owe a collective $1.6 trillion in federal and private student loan debt, according to the Board of Governors of the Federal Reserve System. That’s an average of $32,731 per student.

ƒ Personal loans Personal loans, money that you borrow from the bank, online lender, or credit union, are the fastest growing loan debt in the U.S. (the number increased 42% from 2015 to 2018). Now, more than 44% of Americans have existing personal loans, amounting to more than $36.8 billion by the end of 2018. These aren’t backed by collateral, like a car or a house, and can run up to 36% in interest rates.

ƒ Credit card debt Experian, a credit reporting company that analyzes the information of more than 250 million people and businesses in the U.S., reported that credit card debt reached an all-time high of $834 billion in 2019. This number translates to about $6,506 for each American. 25% of Americans also use credit to pay for basic necessities, like food and rent and 32% say that the largest contribution to their credit card debt comes from discretionary spending, like clothing sprees and entertainment.


But how does debt affect whether you can buy a home?


When you approach a lender, one of the first financial factors they’ll look at is your debt-to-income ratio (DTI). As we’ve explained in Chapter 1, you qualify for most loan programs when you have a DTI below 43%.


Debt can also lower your credit score and a lower score likely means higher interest rates.


If buying a home is ever on your radar, lenders may not trust you to pay them back when you have a low credit score and outstanding debt. If you can’t keep up with what you spend currently, then a monthly mortgage is likely out of the question. It’s best to minimize debt accrual while you’re saving for a down payment.

Debt is expensive; when you put off paying off your debt and continue on with just minimum payments, you’re expected to also pay interest on what you’ve borrowed. As of August 2019, the average interest rate on credit cards hit 17.03%, according to an analysis by U.S. News. Yeesh, that’s steep. What you’ve saved up may end up going toward your debt but if you pay do=-987541re5432` a O[ n your debts, you can focus only on saving up for your down payment. So, let’s dive into how you can tackle that debt.


If you want to buy a house, you need to pay off what you already owe


Fine, you might be thinking. Debt isn’t all that great, but isn’t a mortgage the most expensive debt of them all? Well, many financial experts classify debt into two categories: good debt and bad debt. Good debt applies to investments you make to increase your own worth.


You can think of it as spending money to make money. You take out a mortgage to buy a house that will appreciate or get a loan to finance a higher education to increase your earning potential. In the long run, you expect to make that money back. You get into bad debt when you borrow money for consumable goods that depreciate in value the moment you purchase them.

Think of car payments (the value of a car decreases the moment you drive it home from the dealership), credit card bills that you don’t pay in full, and other personal luxuries like vacations, clothing, subscriptions, and gym memberships.

You won’t make this money back after you spend it, especially if you’re using borrowed cash. So, how can you afford that dream home? Cut down on debt, especially the “bad” kind. Here are 3 ways that can help you trim down on what you owe:


1. Pay your credit card bills in full and on time

If you let your credit balance roll over to the next month, you pay interest on what you owe. That’s extra cash out of your wallet in addition to what you already have to pay back. Let’s say you have about $1,000 in credit card debt with a 17.03% interest rate and you only pay the minimum monthly payment of 4%. It will take you 5 years and 8 months to pay that off!


Your total payment comes out to $1,435.08, which is an extra $435.08 toward interest that you could have put towards your down payment savings. Doesn’t seem like a great deal at all…


2. Find a method that works for you

Financial experts suggest that you find a method to reduce debt that works best for your situation. We found two methods, the Snowball Method and Avalanche Method, that can help you whittle down on what you owe:


Snowball Method

As the name suggests, the Snowball Method requires that you pay off your debts in order of smallest to biggest in dollar amount. Like rolling a snowball, once you pay off the smaller debts, you roll over what you used to pay the smaller amounts into the next balance.


Strive to pay off the entire credit card bill at the end of

every month— you’ll avoid interest and late payment dues altogether, which cuts down on what you owe and also raises your credit score.


 

Let’s look at an example: suppose you owe $300 for a previous medical emergency, $1,000 in credit card loans, and $9,500 in student loans. With the Snowball Method, you’ll start with the medical emergency to pay off in full at the end of the month, while paying the minimum for the credit card and student loans.


The idea is, once you knock down the smaller debts, you gain momentum in paying

off your debts and feel more confident in getting rid of the rest.

- $300 medical payments

- $1,000 credit card debt ($40 minimum payment)

- $9,500 student loan ($380 minimum payment)


In this list, focus your energy on the medical payments. Save up for it this month and pay it off in full. Then, once that’s done, take the $300 you saved to pay off the medical bill and use it toward the next payment, which is the credit card bill. So on and so forth.

 

ƒ Why this method works and who should use it:

If you find yourself swimming in a bunch of smaller to medium-sized debt payments,

you may want to try the Snowball Method. Once you cross off that first payment, you

get an automatic psychological boost.

And when you cross off a payment, no matter how small, Squires, our trusty financial

expert, says to celebrate. This conditions you to feel that sense of victory whenever

you strike through a debt payment that you’ve been sitting on for months and you’re

motivated to keep going.


Avalanche Method

If you don’t want to start with the lowest amount, then there’s also the Avalanche Method, where you pay off your debt in order of the highest interest rates. You’re ultimate goal is to reduce how much interest you pay over time.


 

With our list from the example above, we would order the debt payments like this:


- $1,000 credit card debt ($17.03 average interest rate)

- $9,500 student loan (4.53% average interest rate)

- $300 medical payments (no interest)*


The credit card debt becomes your top priority, since it has the highest interest rate. That way, you pay less interest over time when you finish the credit card debt first.

 

ƒ Why this method works and who should use it: If you have payments that have substantially high interest rates, like credit card bills and personal loans, the Avalanche Method may work better for you.


However, this method takes the most discipline, since you don’t have a chance to celebrate those small victories


You do pay off your higher interest rate debts faster and pay less in what you owe.


So you can wait for that larger celebration and stick to a budget, tackle the big ones first.


3. Make extra payments

Another way you can reduce debt is to make extra payments on your loans. If you can

increase the amount you pay to the actual loan, you’ll reduce the number of months and

years that this debt hangs over you.


Let’s go back to that credit card debt of $1,050. Stick with the minimum of $42

a month, and you’ll pay it off in 33 months and spend an additional $302.55 on

interest. With an extra payment of $100 every month, you shave 25 months off

your timeline and $225.90!


You can find that extra $100 anywhere. It’s all about simple trade offs. Make your lunch for 3 out of 5 days a week or go out for happy hours only twice a month instead of every week. The fact that you’ll only pay $76 for interest instead of $300 should motivate you enough to eat in!



How to Get from Zero to Down Payment


You’ve got your spending under control and have a solid plan in place to tackle those existing debts. Now it’s time to chip away at that down payment goal. Among all the costs associated with buying a house, 70% of renters find the down payment to be their barrier to homeownership.


You can compare the average cost of rent vs. mortgage payments all day long, but the

down payment will be a bigger chunk of change than any security deposit you’ve ever

paid for your next lease. Even if you put the average 13% down on the average $300,000

listing, that’s $39,000. By now you know the benefits of striving for that 20% as well… if

you can swing it.

“The more you can put down, the better,” says Chris Zinn, the top agent and first-time

buyer specialist from Tulsa, Oklahoma. “If you can either get into the house with more

down payment or afford to put a little extra on each month, then you’re increasing your

equity position.”


When it comes to saving for a house, Americans encounter the same issue. A survey of

1,028 homeowners in the U.S. found that 70% wished they had saved more for their down

payment and more than half said their monthly mortgage is too high.


That’s why we have a whole chapter focused exclusively on the down payment and how

to reach your goal faster with:


ƒ Smart savings strategies

ƒ Ideas to stay motivated

ƒ Opportunities to increase your income


Let’s get into it.


Tip #1: Find a way to track your savings progress


You have your ultimate down payment goal, but you need a method to track your progress as you start saving. A study from the Dominican University of California found that a mental note of your goals isn’t enough to motivate you to carry it out. If you want to make things happen, write down your goals, share them with friends and family, and track your progress.


Here are 3 ways you can hold yourself accountable for your down payment goal:


1. Track your progress with pen and paper


As we said in Chapter 1, you’re more likely to reach your goals when you write them down. This “old school” method also works for tracking your goals. If your goal is to save up $50,000 for a down payment in 5 years, that’s $834/month. If you break that down weekly, you’ll need to save at least $208.50 at the end of every week. This is what your monthly goals table might look like.


Week Goal

1 $208.50

2 $208.50

3 $208.50

4 $208.50

Total $834


2. Send weekly updates to a friend

70% of folks who shared weekly updates of their goals with a friend either accomplished what they set out to do or were more than halfway there. So, send a weekly calendar invite to your best friend, sibling, or parent to share your progress.


A support system of friends and family can keep you on track and make sure you stay sane working towards such a big goal. The American Psychological Association shared that one of the best strategies to relieve stress is to talk to people you trust. They can affirm your goals and become a sounding board for when your instinct is to curl up in a ball of anxiety.


3. Download habit tracking apps that track your savings goal

Even if you aren’t tech-savvy, mobile budgeting apps are great solutions to monitor

your savings visually. They can send you reminders, checkpoints, and show your

progress through graphs and charts.


Mint, a free mobile app that syncs your bank accounts and illustrates your spending

habits, has a “Goals” feature that allows you to set financial goals, like a vacation or

buying a home.


Mint links your savings account with the “Goal” and shows you how much you already

have saved, how much more you need, and lets you add “Tasks” that help you hit

your goal.


Another personal-finance app that works is Digit, which links your checking account and stashes your money to a savings account dedicated toward your goal. Digit analyzes what you can comfortably save with your spending habits and income, so you won’t save more than you make. If you select the “auto-save” option, you set how much you want to save and Digit saves it for you automatically.


Tip #2: Get a side hustle

In the event that your current income won’t be enough to reach your savings goal in your ideal time frame, do what 45% of Americans have done: Start a side gig to bolster your income.


Here are a couple of ways you can hustle to save up for the down payment:

1. Walk dogs or pet sit in your neighborhood

Are you a dog lover with extra time after work or weekends? You can make an average of $17.50 for a 30-minute puppy stroll with Wag, a dog-walking app that matches walkers with dog owners who don’t have the time to walk their companions.


You can also pet sit overnight with Wag or Rover, another popular pet-sitting platform more focused on overnight dog-boarding.


Earning potential: $525/week or $2,100/month


3. Deliver food on demand

Another way to make extra cash: work part time for on demand food delivery services

like DoorDash or UberEats. These app-based services partner with restaurants to

bring people food from restaurants that may not traditionally offer the option of

delivery.


With DoorDash, you’ll earn on average around $5 per delivery, plus tips. Based on

your location, you can also earn hefty bonuses through referring your friends to work

with DoorDash.


They claim that “Dashers” can make up to $25 an hour and also guarantee that you’ll

make a minimum of $10 an hour. If you make any less, they’ll pay the difference.


Earning potential:

$150/week or $600/month


4. Take surveys or watch videos

In the 30-minutes it took to choose another Netflix movie to watch, you could have made extra money with online surveys. Swagbucks pays you in cash or gift cards to surf the web or take online surveys. Sounds sketchy, we know, but it’s a legit platform (an A+ rating on Better Business Bureau under their parent company Prodege, 4 out 5 stars on Trust Pilot) and it actually works.


When you make Swagbucks your search engine, take their surveys, and watch videos, you earn “SB” points that can be converted into gift cards or cash. 1 SB translates to $1. For every 10-20 search queries you can earn 10-20 SBs. If you watch 30-minutes of video, you earn 3 SBs, and you can earn 40-100 SBs for online surveys.


We only recommend this method if you have free time. You spend more time than you earn in cash, but it can still help toward that down payment.


Earning potential: $90/month


5. Freelance online


through a number of odd jobs that fit your schedule. You can run errands, remodel kitchens, and make up to $60 an hour for random busy work that other people don’t want to do but you don’t mind taking on. You can make $35/hour just to wait in line for fancy restaurants in Washington, D.C., and assemble complicated IKEA furniture for $40/hour.


Some taskers have even made $2,000/week or charge a flat rate of $160 for any job. But, that’s if you can get strategic with how you charge and what kind of jobs you take on. If you work 5 odd jobs a week for $40 an hour, that’s an extra $200 every week.


Earning potential: This amount ranges on the types of jobs, but if we follow the $200 a week deal, that’s $800 per month.


6. Sell your crafts on Etsy

If you have a knack for handmade crafts, you can sell them on Etsy, which counts 28.6 million active buyers. From pins to stickers and poster designs to jewelry-making, you can make decent side hustle out of it. Though your profits depend on your goods and their pricing, the monthly take-home profit averages $500.


Keep in mind that an Etsy business takes labor: you’re only allowed to sell handmade products or self-produced items, craft supplies, and vintage goods.


Let’s say you decide to sell stickers that cost around $6.25 for each sheet. For every product you put on your Etsy store, you have to pay $0.20 to list and 3.5% off of every sale. So, you’d only make about $5.83.


Don’t forget to factor in the cost of production. How much did it cost to buy the sticker printer and cutter? How much time have you spent to design and make everything? Take these into consideration and try to cross off every prep item on this checklist before you set up shop.


Earning potential:

This number depends on what you make and how many of your products you sell, which isn’t calculated by hours spent. If you do decide to sell stickers and get about 25 orders a month, that’s about $145.75, not including cost of production.


7. Invest and trade stocks

Some people have turned to fintech apps to make cash on the side. RobinHood, an online stock trading platform, lets you invest and buy shares on your phone. There’s no commission to trade and no minimum deposit for the standard Robinhood account. If you’re smart about trading like this blogger, you can make a 20% gain off of each trade. Another Robinhood reviewer increased her portfolio value by 65%.


To get decent payoffs with Robinhood, you can’t just throw your hard earned money at the app. Pay attention to the stock market, select the right stocks, and do your research.


Earning potential:

Your earnings depend on the market, your trading strategy, and the stocks you buy and trade.


8. Become a local tour guide

Have extra time on a Saturday for a quick tour of your neighborhood? You can turn local knowledge of your city into a lucrative side hustle and make around $50-$75 an hour leading an independent tour.


Through the app Vayable, tourists can hire an independent tour guide (like you!) to bring them around the city. As a tour guide with Vayable, you can charge anywhere from $8 to $200 per tour. On average a Vayable tour guide can make $100-$200 per week.


Earning potential:

$400 a month.

*Assuming you charge $50 for a tour and you book two every week


Capitalize on your unique skill set

There are many ways to make more money with a side hustle. You just need to figure out what works for you and whether it can help you save up for that down payment.


Tip #3: Pick a high interest savings account

As you start to build your savings, you’ll need a better place to put that money other than your mattress or under the floorboards in a rusty lunchbox. But resist the urge to move it into your low interest savings account at the local bank!


Your best bet is a low-stakes, high interest savings account that yields more than 2% interest.


If it’s money that’s strictly dedicated toward your first time home purchase, I’m a big fan of online banks and their money market rates,” says Squires.


He recommends online banks with high annual percentage yields, like CitiBank that has a 2.36% APY or HSBC Direct Savings, which currently has a 2.20% APY. Meanwhile, the average APY for brick-and-mortar banks across the U.S. doesn’t even hit 0.3% as of 2019.*


If you follow through with the $10,000 a year savings for the down payment and put it in a CitiBank account, that’s an extra $236 in your account. Multiply that by the 5 years you’re saving up, and you get an added $1,180.


Tip #4: Set up automatic deposits and never look back

When you have to rely on yourself to manually transfer cash into your savings account, you may be tempted to skip out on a month and even forget. That’s why you should take advantage of auto-save options, which puts your savings transfer on autopilot.


“Open that savings account online, have a certain amount of money put in there automatically, so that every pay period you don’t even see it. So you don’t even miss it,” he says. “It’s as if it’s invisible money that’s automatically going into your future and when you’re ready to buy a house in two years, it magically shows up.”


Certain banks allow you to allocate a percentage of your deposit from your employer toward a savings account as well. Bank of America lets you schedule automatic transfers from your checking account into your savings account.


If we stick to saving up $834 a month for your down payment, you can set an automatic transfer at the end of every month once all your paychecks roll in. Then, it won’t even feel like you’re missing out on that amount and you won’t need to remind yourself every month to physically transfer it yourself.


You can also pool loose change. No need to take the hammer to anymore piggy banks. With Bank of America’s Keep the Change program, your transactions are rounded to the next dollar and the difference is transferred to your savings account.


For example, when you buy a coffee for $4.50, the price is rounded up to $5.00. That $0.50 is then transferred to your savings. A coffee everyday turns in $3.50 a week. Multiply that by 52 and you’ll get $182 a year.


Tip #5: Save first, spend later

Warren Buffett, chairman and CEO of Berkshire Hathaway and one of the most famous financial experts in the world, offers a sound piece of advice:


“Do not save what is left after spending; instead spend what is left after saving.”


Similar to an automatic savings transfer, set up a system in which you deposit a portion of what you make at the beginning of the month into your savings account. From there, you can adjust how much you spend instead of cutting back on what you save because you’ve overspent on your budget.


Let’s say you need to buy a new bike for your commute this month. Don’t drop $300 on a glossy mountain bicycle without a review of your savings. A smarter way to keep your down payment savings in check is to transfer how much you need to save first (in our case, it was $834). Then, you can think about whether a new bike is worth the investment.


If you cut it close this month with payments and expenses, at least you’ve already saved the $834 toward the down payment. If you purchased the $300 bicycle with a tight budget, then you’re only left with about $500 for savings and down a couple hundred bucks that you have to make up somewhere else.


Save up first, so you don’t scramble for leftovers at the last minute and come up short.



Are You Ready? Now It’s Time to Shop for a Mortgage


In the first four chapters of this book, we’ve covered a lot of ground. At this point you’ve got the tools you need to:


ƒ Set a savings goal in line with your income and homeownership dreams

ƒ Do a budget audit and cut back on unnecessary expenses

ƒ Pay down current debts efficiently

ƒ Piece together a down payment over time


Exercise patience through this process. An analysis from home rental site HotPads found that it will take the average renter 6.5 years to save for a 20% down payment. Depending on your individual financial situation and goals, you could be ready to buy a house in one year or 10 years. But to see results you’ll likely need to incorporate these recommendations and strategies into your day to day for the long haul.


With your finances in great shape, you’ll be ready to talk to a lender and start the process of obtaining a mortgage with confidence. Before you get there, though, make sure you’ve covered the following:


Upfront costs

Down payment:

Your biggest expense out of pocket will be the down payment. With a 20% down payment, you’ll reduce mortgage payments, secure a better interest rate, and likely avoid private mortgage insurance on a conventional loan (though there are a few exceptions). For a $250,000 home, that’s $50,000 right as you sign the closing documents. 20% isn’t the only option, however. With FHA loans and other lender options, you can put down as little as 3%. Create and work toward a down payment savings goal that’s right for you.


ƒ Closing costs:

At this point you should also have closing costs worked into your home buying budget. Closing costs for buyers range from 2%-5% of the final asking price and may include fees for the loan (application and loan origination), title search, and transfer taxes. Let’s say you end up with ~4%. Then, you’ll need to prepare to pay $10,000 in addition to the down payment.


On down payments 20% isn’t the only option, however. With FHA loans and other lender options, you can put down as little as 3%.


Future housing costs

ƒ Mortgage payments::

Other than the down payment, make sure your current income will comfortably cover your monthly mortgage payment. Missed mortgage payments can result in late fees, a lowered credit score, and most drastically, foreclosure.


Property taxes, insurance, and HOA fees

You’ll also need to factor in the cost of taxes, insurance, and additional fees. A 2019

analysis by WalletHub shows that average annual property tax rates range from

0.27% in Hawaii (which claims the lowest average real estate tax rate) to 2.44% in New

Jersey (the state with the highest average real estate tax rate). But property taxes

also vary by city and county.

Make sure you know what the percentage is for the area

where you could be looking to buy and factor that into your savings.

Homeowners insurance, which protects your property in the event of unexpected

damage, theft, or natural disasters ranges from $600-$2,000 per year.

If you’re home is in a homeowners association, then you need to pay for HOA fees,

which can cover maintenance, repairs, access to amenities, and anything else that

you share with the other members of the HOA. These fees vary based on what the

HOA community offers. Fees can range from $100 to $700 or more.


Home maintenance and moving costs:

The home you buy might appear pristine in listing photos and during the open house. But you’ll never see what’s under the floorboards or in the pipes. Pest control, plumbing issues, moving costs, and even window treatments that the previous owners packed up may all come out of your own pocket.


Emergency savings cushion:

If the above costs would wipe out your entire savings, you don’t have enough in the bank to buy a house quite yet. After closing you’ll need to have enough money leftover to cover the unexpected and make sure you’re comfortable in the day to day. Mark Squires of Wise Choices Financial advises his clients to split their savings into two parts: a “9 o’clock emergency fund” and a “two-week” emergency fund.


9 o’clock savings Imagine this: just as you drop off the last box at your new home, your car sputters and breaks down. This is when you dip into your 9 o’clock savings, a short-term emergency fund covering smaller issues that need to get fixed by the next morning. He suggests at least $1,000 to $1,500 as a start for these types of expenses.


Two-week savings

With two-week savings, Squire says, “you should really strive for three to six months of living expenses.” Think of your two-week savings as your long term emergency fund. It covers events that call for a bigger dip into savings than a tire pop, whether it be an unexpected loss of income or a new family member coming into the picture.


At a quick glance, this is what you should have saved up:


Money you need for the down payment: $50,000

Money you need for closing costs: $10,000


Money you still need in the bank:

-$1,345/month for your mortgage

-Assuming a 30-year fixed loan, 3.9% interest rate


• $7,800 in your emergency fund

- $1,500 for your 9 o’clock savings

- $6,300 for your two-week savings (3 months of living expenses)


Once you’re on strong financial footing, you’re ready to line up financing and start shopping for homes. Follow these steps to get a mortgage that you’ll be happy with long term.


Step #1: Contact several lenders

Like a dating app, it takes a couple of swipes before you match with the right lender.


Fannie Mae’s National Housing Survey found that while one-third of buyers didn’t get multiple quotes from lenders, the two-thirds who comparison-shopped secured better terms that fit their financial background.


With just one extra quote from a lender, buyers could save $1,500. With five quotes, they can save $3,000 or more.


Your real estate agent can provide you with a list of lenders they trust, but take the initiative to do your own comparison shopping as well.


This is an important decision. Your mortgage lender is a key player in the home buying process. If your lender drops the ball, you could risk losing your dream home over something as simple as a delayed document.


Before you go all-in with any lender, ask these questions that can help you figure out if they’re the right one for you:

How long does it take you, on average, to process a loan? What percentage of your loans close on time?


1. How long does it take you, on average, to process a loan? What percentage of your loans close on time?

Sellers want buyers who can get their finances in order and close as quickly as possible. If you’re working with time constraints, you need to know your lender can deliver on time.


2. Do you charge an origination fee? What other types of lender fees do you charge?

In Chapter 1, we summarized what kinds of fees you can expect at closing. While many closing costs (like third-party fees) are required no matter which mortgage company you work with, lender fees such as origination and credit report fees are entirely optional. Every lender approaches them differently. Lender fees are summarized in a federally required document called the Loan Estimate.


Read your loan estimate carefully so you can assess and compare costs among different lenders. HomeLight Home Loans, for example, doesn’t charge any lender fees at all.


3. What are your down payment requirements?

Many lenders will recommend that 20% sweet spot for your down payment. But that’s not the best option for every buyer. Make sure your lender will walk you through the available choices and talk to you about down payment assistance programs you might be eligible for.


4. What interests rates will you offer me?

Ask the lender for an interest rate quote and the annual percentage rate (APR) for the loan.

The APR includes the base interest rate and closing costs like lender and settlement fees. The APR can vary from lender to lender, and based on the type of loan. You should compare the APRs quoted to you by lenders, as well as the base rate. While two lenders may quote you the same base rate, their resulting APRs could vary