Maybe you are a newlywed couple looking to buy your first home, or perhaps you have been saving part of modest salary in order to be able to buy a home on your own. In any case, you need to be prepared for not only a sizeable down payment but also enough to cover your monthly mortgage payment. Obviously, the more you can put down, the better. Many people recommend having at least a 20 percent down payment. Additionally, you can plan to spend about 25 to 28 percent of your monthly budget on your mortgage payment, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and any homeowners association (HOA) dues. In order to be able to pay for all of these expenses, you need the ultimate budgeting plan to save for home ownership.
1. Figure Out a Timeline
In order to have enough money saved for a down payment, you need to know how much you need. You should start by figuring out what kind of home you can afford. Multiply your stable monthly income by a figure between .25 and .28, and that's what you can afford per month. If your monthly income is $2,000 after taxes, you can afford a $500 to $560 mortgage payment at 5 percent interest, which is probably going to be around a $100,000 home. That means that you should have about $20,000 saved for the down payment.
If you are looking to buy a home in five years, it will be fairly easy to save $4,000 a year because you will only have to save $300 a month for your down payment. If you are looking to buy a home in two years, however, you will have to save more aggressively, as you will need to save $10,000 the next two years.
2. Automate Your Savings
If you are not naturally a saver, you will want to set up a program where you are consistently putting the amount you figured out per month into a separate account specifically for the down payment. You can do this through your bank with a recurring payment every month. Automated savings is an easy way to save because you do not ever have that money available to you.
There are also apps available that can help you save small amounts of money in addition to your automated monthly amounts. For example, Digit is an app that allows you to link your accounts to it, and it will remove small amounts of money from your checking or saving accounts over time. It watches your spending and notices trends and then removes money that you do not need. You could have Digit place this extra money into a down payment fund, and you will have that much more later on.
3. Put Anything Extra Toward a House
Throughout the year, you will sometimes find yourself with a little extra money. Don't let that be a spontaneous reason for a party! Instead, put that money toward your down payment on a house, and you may end up with the 20 percent you need more quickly, or even more saved than 20 percent overall. For example, if you get a bonus check at work, put that into your down payment fund. Put your income tax refund or any gift money toward your down payment fund. Finally, capitalize on the two "extra" paychecks you will get every year if you get paid bi-weekly. Instead of living in style that month, maintain your normal monthly budget and put both of those entire paychecks into your down payment fund.
The ultimate budgeting plan to save for home ownership comes down to planning. Figure out what you need, when you need it, and start saving through an automated savings account and by putting any windfalls you receive toward your house. It might seem hard in the moment, but when you finally get to purchase your home, it will be the best decision ever.