Living with your parents as a young adult can feel limiting. You don’t have a place of your own. It isn’t much better if you have a roommate and are wasting money on rent. Life is so much better if you have a space that is truly yours.
But how do you make that happen?
Here are five tips you need to follow if you want to meet your goal of buying your first home.
Run The Numbers
Start by finding an online mortgage calculator and playing with it a bit. See what kind of impact different percentages of down payments have on the mortgage payment. Look at homes of the type you want to own and get a feel for roughly how much they cost.
This will give you some idea of how much money you will need to save for a down payment. You may be able to sell some assets or get down payment assistance from family. Not everyone has the same circumstances. You know yours better than anyone. Once you have a ballpark figure to work with, think about the best way to hit that goal.
Understand Lending Ratios
There are two figures that will significantly impact whether or not you get approved for a particular mortgage amount. One is referred to as the GDS Ratio (Gross Debt Service Ratio) and the other is called the TDS Ratio (Total Debt Service Ratio).
For the GDS Ratio, they add up all the expenses of home ownership and compare it to your income. The guideline here is that it should not exceed 32%. For the TDS Ratio, they add up all debt payments and compare it to your income. The guideline for this is that it should not exceed 40% of your income.
In laymen’s terms, the carrying costs of home ownership should not exceed 32% of your budget. Additionally, no more than 40% of your overall budget should go towards debt. So, before you purchase a home, your monthly debt payments should be no more than 8% of your income. If it is more than that, you’ll need to do some work.
The good news is those are only guidelines, not firm limits. The final decision can be influenced by other factors, such as an excellent credit score or a larger down payment.
Budget and Save Up
A few lucky souls will crunch the numbers and realize they have the resources right now to go looking for a house! However, most people will need to first save up a down payment. This means setting a savings goal and doing some basic budgeting. As a first-time buyer, you only need 5% for a down payment (with mortgage insurance).
You can’t figure out how much you can realistically save if you have no idea where the money goes. So, start by finding out how you are currently spending your money.
Write down everything.
That coffee each morning, the weekly groceries, gas – all of it. Make sure to account for your recurring monthly expenses as well like rent, car payments, cell phone, and other bills.
Once you have this information, you can start working on cutting expenses in order to put aside funds towards a down payment. However, budgeting is not just a math problem. It doesn’t really work to just arbitrarily cut expenses across the board…
The Right Way to Cut Costs
Look at any unnecessary purchases or expenses. If you’re eating out a lot, it’s time to limit this to a few times a month. The same goes for social gatherings where you spend money that could be going towards your down payment. It’s not reasonable to completely cut your entertainment expenses, but there are ways you can lower costs.
Find things to do that are free or inexpensive. If you want to watch a movie, check out what’s on Netflix or another streaming service. See if you can bundle your internet, phone, and TV services for a better price or if you have a cell phone, consider dropping your home phone altogether.
With the right mindset, you’ll find ways to lower your expenses while still having fun, knowing you’re saving for a place of your own.
Start Window Shopping
It will take time to save up a down payment. This is the perfect time to start educating yourself about the kinds of homes that are available and the communities they’re located in. The more you know, the more prepared you will be to make a smart home buying decision.
So, start looking around now and make a wish list of things you want and need. However, be sure to clearly distinguish “must haves” from “nice to haves”.
Buying your first home is an exciting time in your life. The best things you can do to ensure the process goes as smooth as possible is to do your own research and prepare yourself financially.
Informed decisions are always the best decisions. Now you’re ready to start saving up for a down payment and explore available new home options that meet your needs and your budget.