The most important decision I’ve made as an adult is the one to buy a house. I rented from the time I left the dorms until I was 27, and I hated every minute of it. I am the type of person who needs roots, needs one place to build community and routine around. I am the type of person who likes to paint walls and do projects around the house. People tend to be overly impressed when they learn that I am 27 and bought a house on my own, but buying a home is just like achieving any other goal. You need a plan and you need to stick to the plan. It was no different than my goal to go to college. I knew before I even got my first “real” job that my next big move was to buy a house.
The bulk of buying a house is saving up the down payment to buy a house, which can be very challenging. Once I started working there was a lot of temptation to do different fun things and buy silly toys. Right off the bat, I used the 50/20/30 budgeting rule to set my savings rate. I switched the 20 and the 30 category so i was saving 30% of my income. I also set these percentages just based on my take-home pay. Saving 30% of my take home pay let me save up the down payment for my house in two and a half years. This percentage changed at certain times but I aimed for it. And I still had fun – I swam with dolphins the summer after my first year teaching – I just was extremely intentional about what I spent money on.
Here are the big ideas you need to keep in mind as you consider and plan for buying a house.
Saving up for your down payment is something you need to plan for way, way, way in advance of buying your house. Depending on your income and the market you buy in, you could need anywhere from 1-5 years to save up that money. In my midwest market, I saved up just about $14,000 which was 15% of my home price. In some housing markets, you might need $30,000 or $60,000 to make 15%. You need to know your market and plan for it. Don’t just think because you need a lot of money that you can’t do it. You just need to recognize that it takes time to make this purchase. I’ve talked to people who decided to buy a house, talked to a few people (bankers or real estate agents) and then realized they didn’t have the money so they gave up the goal. Just because you don’t have the money now, doesn’t mean you can’t get it eventually.
On average, I saved about $600 a month over the two or so years I was saving for my house (the first thing I saved for was a car right when I started working). This monthly rate translated to about 4% of the total I put down on the house. That means it took me 25 months to save up. Rather than just look at potential down payment amounts and think “woah, that’s a lot of money,” break it down in to percentages to make it more manageable. If you can save 4% of your downpayment each month, then it will take 25 months to save. If you can save 3% it will take 33 months; if you can save 2% it will take 50 months. Just start with something and work your way up as you find ways to cut expenses or earn more at work.
Amount needed for the down payment
I grew up learning from my dad that you need 20% of the total home cost for your down payment. This is what I was aiming for until I reached a breaking point in my rental. It was turning into an unsafe place to live and I wanted to get out as soon as I could. I had already spoken to a mortgage broker by that point and I knew that I didn’t actually need 20% to pull the trigger on this purchase.
There are different types of loans you can get – conventional or FHA or VA guaranteed – but in most cases you can get a way with way less than 20% down. The conventional loan I had qualified for when I went in for pre-approval, I only needed between 3-5% as a down payment. FHA (Federal Housing Authority) loans only need 3% down and if you are a veteran (thank you for your service!) you actually could be able to buy a home with a VA backed loan for 0% down. Is it a good idea to put down the bare minimum? Like all things, it depends. You’ll need to consider how this will affect the interest rate on your loan and an extra fee that would be tacked on called PMI (private mortgage insurance). PMI is required when you put less than 20% down and generally goes away when you have between 20% and 22% equity in the house. You want to weigh if those things are worth getting into your first home faster. For me, I pay $12.01 in PMI so putting only 15% down instead of taking another 6 months to be able to buy (when my current house wouldn’t be on the market… yikes!), is worth it. I now live in a safer place and feel physically and psychologically safe. If your PMI would end up being really high, it might make sense to wait. But you don’t actually need a full 20% down. I personally don’t recommend only 3% down because you’ll pay PMI for a very long time and when you borrow more, you’ll pay more in interest.
Where to save
Some people save their down payment in an investment account to make it grow faster. This was recommended to me when I first opened my account at Schwab but I didn’t end up doing it. If you have a really clear timeline and can handle the volatility of the market, by all means go for it! You’ll earn more interest than I did and have more to put down. But I didn’t have a super clear timeline in mind and I was thirsty to buy a house as soon as I could. But if, for example, you’re saving while finishing a medical residency and know you’ll rent for those 3-5 years, you could pick an investment profile that works well for that time line.
If you’re a nervous nelly like me and don’t know exactly when you want to buy, you might want to go with a high yield savings account that is FDIC insured and has a guaranteed interest rate. The thing about a stock market approach is that is possible that the timing of your personal readiness might not match up well with the success of the stock market. I wouldn’t want to be in the position where we’ve entered a bear market and I’m ready to pull the trigger on my home purchase. I used a Barclays High Yield Savings Account to save for my down payment. I used the Dream Account which is no longer in circulation. It provided bonuses for every 6 months of deposits and for every 6 months of no withdrawals.
When I was researching buying a home for the many months I was preparing, I read about needing enough money to cover closing costs which would be between 3% and 5% of the home cost. When I learned that, I really felt like it would be a long time before I could buy a home because a $100,000 house would mean I needed between $15,000 and $20,000 for a down payment and then an additional $5000 in cash for closing costs. Everywhere I read that I would need to work that into my home buying budget. Until one day, a friend’s husband said to me “unless you get a good realtor who gets the buyer to pay for closing.” I literally had no idea about the process of buying a home and this option was a big piece of news. As I learned after working with my realtor, including closing costs in the negotiating process is very common for first time buyers. My seller paid all of the closing costs, and this is something you write into your official offer. You don’t necessarily have to pay for closing costs.
Know Your Buying Market
The biggest thing you need to know in this process is the market you intend to buy in. Do research, go out and see houses, and see what your specific down payment will get you. Know what you can and cannot afford by going in person to see the houses. In a midwest town, $15k can get you a nice sized home but it might only get you a shack in San Francisco. But there can even be big differences in metropolitan areas. On the west side of town, my money wasn’t getting me as nice of a house as was available on the east side of town. Don’t be afraid to look everywhere. it doesn’t cost a thing just to look.