When You Should Start Saving For a Home, According to Experts
|This content was originally published on Money.com|
When you’ve been in lockdown for nearly a year, it’s natural to start fantasizing about moving. The idea of being somewhere else, in a spacious house with amenities, sounds extra appealing right now.
But the logistics might be tricky, especially given how the Covid-19 crisis has upended so many people’s future plans.
How far out should you start saving for a house? What should the timeline look like? Should you be putting money away now, even if you’re years away from actually buying real estate?
The answer is yes, according to Jackie Boies, the senior director of housing and bankruptcy services at Money Management International. Saving early allows you to put funds away and prepare for the challenges or unexpected costs you’ll face as a homeowner.
“Please, please start now,” she says. “Several years away is absolutely the perfect time to start.”
Boies says that the more time you have to prepare, the more pleasant the home-buying experience will be. Even if you don’t end up using all the cash you set aside for the down payment, having extra money on hand can’t hurt. It could give you more flexibility during your home search. You could also use any leftovers to outfit your new house with new curtains, a lawn mover or helpful appliances.
“If you think that you will ever buy a home, it’s never too soon to start saving for it,” Boies says.
It’s more challenging to save for a down payment now than ever, adds Skylar Olsen, senior principal economist at Zillow. And that was true way before Covid-19 hit.
She runs through some quick math: The median home value in the United States is about $250,000 and the most recent estimate on the median household income is roughly $63,000. If you plan for a down payment of about 20%, that’s $50,000. If you were to save 10% of a $63,000 salary a year, it would take you nearly eight years to reach your desired sum.
A couple of decades ago, achieving that goal didn’t take as long. But home values have outpaced income, so young people are having to get creative. A 2019 Zillow survey found that 43% of first-time buyers with a mortgage relied on gifts and/or loans from friends and family in order to afford their down payments.
Even if you’re years away from buying a home, start looking up average house prices in specific locations you have your eye on. Then, you can work backwards to figure out how much money you’d need to save for a down payment. It’s also smart to start thinking about what sorts of things you’re willing to sacrifice in order to buy a home. Would you be OK with cutting back on entertainment spending? What about getting a side hustle? Canceling a vacation?
Another way to accelerate your home-buying timeline is to start researching the different types of loans out there. Luke Babich, the co-founder of Clever Real Estate, recommends looking into options like Federal Housing Administration loans, which allow people to finance homes with down payments as small as 3.5%.
“It’s worth calling a couple of banks and mortgage lenders in your area to see what’s available,” he says.
Another strategy, says Babich, is to buy a property to rent out and generate revenue that you could then put back into your real estate interests. It’s a numbers game.
“Don’t let your savings timeline be the thing that’s holding you back from buying,” he adds. “You should know when you want to make the move to buy and plan around hitting that target.”
Bottom line: Given that it’s probably going to take several years to save up the amount of money you’ll need for a down payment, you should start putting cash away now if you can. At the very least, you should consider what your long-term goals are and begin preparing for them mentally.
Even if you can’t afford to bulk up your house savings account right now, Babich says you can take this time to work on your credit score. Paying bills on time and building out your credit history will pay off later on.
For more advice on the homebuying process, check out my FREE First-Time Homebuyer Challenge. You’ll learn how to build an emergency account, get your credit score up (and protect it), qualify for a mortgage loan, tackle credit card debt and work with a realtor. It includes five days of video coaching, mentoring and great tools to help you take action. Click here to get access.
Read next: Why You Should Buy a Home During Covid-19