It’s no secret that we’re a little obsessed with small-space hacks, but there comes a time when every renter grows weary of the struggle. There are only so many times you can find temporary ways to update your rental home or deal with your roommate’s dirty dishes before the adult inside you screams, I just want a place of my own!
If buying your own home seems more like a pipe dream than reality, it’s time to get serious about saving. “A lot of first-time buyers say they want to wait and save more money so they can skip the starter home and move straight into their dream home,” says Kathy Cummings, homeownership solutions and education executive at Bank of America. “What many millennials are starting to learn is that it’s okay—in fact, it can be a good thing—to buy what you can afford now. People who wait are missing out on the chance to start building wealth and equity, not to mention they are paying someone else’s mortgage with their current rent payments.”
Yes, now’s the time to get into the market and put that hard-earned rental money toward your own home. Here, Cummings and Nicole Lapin, author or New York Times best seller Rich Bitch, share exactly how to maximize your savings to reach that major milestone.
This is how to afford the downpayment on a home, without losing your lifestyle. It’s possible!
Step 1 Follow the 28% Rule
First things first: You need to set a savings goal. Without one, you’ll lack the motivation to put money away and won’t fully understand the reality of affording a home. According to Cummings, the 28% rule is a great way to assess what you can afford. “For a starting point, take whatever you make each month, before taxes, and multiply that by 28%,” she recommends. “That’s a good rule of thumb for how much a manageable monthly payment might be, including taxes, insurance, and private mortgage insurance.”
She stresses that just because you can borrow a lump sum from the bank doesn’t mean you should. “To figure out what you can afford when you’re saving for a home, I recommend asking yourself, How much should I borrow? instead of How much could I borrow? This approach focuses on the amount that comfortably fits your budget.”
It’s also important to note that you don’t have to brave this process alone. “Once you’ve gotten a general idea of what monthly payment fits your budget, talk with your lender, who can help you translate that payment into a realistic mortgage amount,” she says.
Step 2 Understand the Big Picture
A down payment isn’t the only expense you need to account for when saving for your first home. Cummings says these are the most commonly overlooked expenses to build into your budget:
- Home loan fees: “Many homebuyers just focus on the interest rate when shopping for loans. However, they tend to fare better by keeping the annual percentage rate (APR) in mind to understand the true cost of their mortgage. The APR reflects the total cost of a loan during the entire lending period and includes fees like mortgage insurance, closing costs, and loan origination fees, among others.”
- Home inspection costs: “Home inspections can cost a few hundred dollars, and real estate professionals frequently recommend them to ensure buyers understand any repairs that might be necessary.”
- Moving costs: “Most buyers will need to pay for furniture movers or moving trucks, but renters may need temporary housing if they have to move out of their apartment by month end and before their new home loan closes.”
- Home furnishing costs: “Most homes do not come with a refrigerator, washing machine, and dryer and in some cases window treatments.”
- Maintenance and repair costs: “Once you own your home, there is no longer a landlord to call when something breaks.”
Step 3 Assess Your Wants vs. Needs
This is a crucial step in being able to afford your first home. That two-story mansion with a stand-alone tub and walk-in robe might represent your dream home, but it could also deter you from saving money when you realize how long it will take you to afford the deposit.
According to Bank of America’s new Homebuyer Insights Report, a huge 68% of young homeowners say their current home is a stepping stone to their forever home—and that’s smart, says Cummings. Why? It helps you build equity and enter the market. Yes, you’ll be one step closer to that Insta-worthy tub.
“Unless you have disposable income, you’re going to have to make some trade-offs,” she says. Her top tip? Ask yourself what you’re willing to sacrifice in a home and what you’re happy to budge on. Write a list of every non-negotiable so you have a clearer idea of the cost. “Things to consider include neighborhood, proximity to public transportation, new appliances, and school districts,” she says. “For example, first-time buyers should consider up-and-coming neighborhoods. Buying along the edges of higher-priced neighborhoods may be more affordable, which can help you reach your homeownership goal sooner.”
Step 4 Jump-Start Your Savings
Not ready to sacrifice your multiple coffee-a-day habit? Yes, it’s important to minimize unnecessary daily expenses, but Nicole Lapin, author of Boss Bitch and former news anchor, has an alternative that won’t cramp your current lifestyle: Make money with items you already own.
“According to a recent ThredUp report, the average woman doesn’t wear 60% of what’s in her closet. And the estimated retail value of that unworn clothing across the country? A whopping $220 billion!” she tells MyDomaine. “I’ve learned over time that in order to be a savvy investor in control of my finances, I need to be in control of my closet and my wallet.” The takeaway: KonMari your closet and your home and sell any items you haven’t used in the last 12 months. And just like that, you’ll kick-start your first home savings account.
Step 5 Find Creative Ways to Boost Your Income
It’s easy to scrutinize outgoing money, but what about the flipside? If you’re unprepared to budge on your current lifestyle, the best way to add money to your first home fund is to look for smart was to increase your income.
First up, ask for the money you deserve. “If you think you deserve a raise, ask for it! If you think you’re the perfect candidate for a job, apply even if you don’t meet all the requirements,” says Lapin. “You’ll never get ahead by staying in the safe lane, and taking the leap could get you one step closer to affording the home of your dreams.”
Don’t stop with your current job, though. Lapin recommends cultivating a side hustle to really boost your income. “Tap into a skill you have or a need you can easily fulfill for others,” she says.
Finally, make those extra dollars work even harder by depositing them into the right savings account. “High-yield savings accounts are a popular choice among consumers saving for a down payment,” says Cummings. “There are great tools out there such as savings goal calculators that can help you realize what you’ll need and jump-start a plan.” With the right approach and expert help, you’ll be one step closer to that dream home with a stand-alone tub.
Are you saving for your first home? Tell us what lifestyle changes have had the biggest impact on reaching your goal.