Owning a home is a goal that most people have. Owning a home allows you to have independence and complete control over your residence. Homeownership can be a sound way to start building permanent life foundations and gain wealth. But, given the current state of the real estate market, achieving this goal may seem like an arduous task for the majority of people that find themselves in the middle class. However, there is good news: whether you are looking to purchase a home as soon as within the next year or five years from now, saving money to buy a house is possible.
When I was first out of college and renting in Boston, the goal of homeownership was always there but didn’t really feel feasible until I was more established in my profession. But, I was able to see the paths to homeownership and get there quicker than expected.
It’s a hot real estate market right now in the latter half of 2021 and incredibly competitive, especially for first-time buyers. My heart goes out to young adults and young families looking to break into the real estate market right now without any guidance or strategy. But, hope is not lost. There are avenues, strategies, and lifestyle choices to help would-be homeowners become homeowners and start earning equity on a residence.
As a family financial planner, helping young families save for their first home is a cornerstone of the profession. Honestly, it’s a great feeling to see clients upgrade their lives and reach their homeownership goals.
How to Start Saving for a Home
I wanted to take a moment and outline some middle-class saving tips as a resource to help young homeowners reconcile their financial habits and begin saving successfully for homeownership.
Hire an Expert
One of the wisest decisions you can make is to hire a financial family planner. Not only will a professional be able to help guide you through making suitable financial decisions, but you are also more likely to save more money in a shorter period of time through the aid of a financial planner than if you were to tackle this endeavor on your own.
Navigating the real estate market without a grasp on your finances is a scary place to be, but guidance is available. Having an idea about the necessary steps it will take to reach your goals can help you combat FOMO and the temptation to buy your “dream home” with your first real estate acquisition.
With some financial guidance and foresight, you can plan according to your shared life goals and make your money work for you on a manageable timeline.
For example:
Your first home could be a studio, and you stay there for 3-5 years while equity grows. Then you and your spouse can move to a small 1-2 bedroom home, while still growing equity.
Later, when the first baby is on its way, upgrade to a larger two or three-bedroom for the needed space. If your money is working for you and your equity is growing, you may be able to move into that dream home in Brookline by the time your child is five years old – just in time to not have to worry about the Boston public school lottery!
Research Home Prices and Stay Within Your Means
A time-tested way to climb the ladder of homeownership is to move at a reasonable pace. Buy something that is well within your reach and build some equity, don’t try to buy outside of your range. It is amazing how some growth compounded can increase your purchasing power as you grow. I stress this type of mindset when guiding financial planning for parents.
For example:
If you decide to buy a $350k condo with 10% down, you will start with $35k equity. Now, let’s assume that the condo goes up 5% per year in 5 years and eventually that the same condo will sell for $446k. Your mortgage should have gone down also. Your $35k equity could grow to $140k. Assuming your income qualifies, you could use that equity as a 20% down payment on a $700k property and thus begin the journey of not just homeownership but earning more equity while improving quality of life. Even if the first condo is not the perfect home, it’s a means to build equity and start on the path to a dream home.
See if You Qualify for a Government Loan
There are some loans available that require lower down payments and better interest rates than conventional home loans. The government offers these loans to those who qualify. The top three types of government-backed mortgages include:
- FHA mortgage. The Federal Housing Administration requirements:
- 3.5% down payment
- 580 credit score
- It is possible to qualify with a credit score as low as 500, but the required down payment would be a minimum of 10%.
- VA mortgage. A Veterans Affairs mortgage requirements:
- Military affiliations
- Depending on other factors, a down payment may not be necessary
- USDA mortgage: The United States Department of Agriculture mortgage requirements:
- Low-to-moderate income earners who are buying in a rural area
- A down payment is not necessary
If you qualify, government loans are fantastic options that will allow you to buy a home sooner with a lower down payment.
If your plan involves taking out a conventional mortgage, a 20% down payment is highly recommended by most financial experts; this will help you avoid paying extra monthly fees associated with private mortgage insurance.
How to Start Saving for a Home: Do What’s Right For Your Budget and Goals
A fee-only financial planner will help you understand what is feasible for you and your family as far as the home’s within your budget, different types of mortgages available to you, and what to expect on a return from your home purchase in the near and distant future.
As a financial planner, I aim to help families pursue financial/homeownership goals without being STRETCHED. Don’t buy a home because friends or family told you to; buy a home because it fits your financial situation, upgrades your quality of life, and is your goal.
I am here to help figure out all the details along the way!
To read more about middle-class income saving strategies, please read my accompanying articles:
Middle-Class Income: Renting vs. Owning in a Hot Real Estate Market
$350k/year for a Middle-Class Lifestyle? Here’s Why, and What You Can do About it
Financial Planning for Engaged Couples: Tips for Starting Out
