6 Tips to save for a home in the next few years
1. Pay down your debt
Your down payment saving strategy isn’t all about increasing the amount of money you put in your bank account. It’s equally important to focus on decreasing the amount of money you owe for other debts like credit cards, student loans and car payments. By lowering your debt-to-income (DTI) ratio, you’ll be in a better position to qualify for a mortgage down the line.
2. Make aggressive career choices
If you’re just getting established in your career, now’s the time to build your earnings and savings for a future home purchase. Figure out the right way to ask your employer for a raise, or be willing to look for other opportunities where you’ll be rewarded with a bigger paycheck. Sixty percent of workers who switched jobs over the past year earned more money in their new roles, even accounting for the fast pace of inflation, according to a recent study from the Pew Research Center. Over the next few years, a wise career move can make a huge difference in your bank account.
“[Homebuyers] can improve their financial standing by leaps and bounds in that period of time,” says McBride. “They may buy a home for not much more than they would pay today, but their income could be 50 percent higher.”
3. Focus on your local market, not the headlines
As you think about budgeting for a house, it might be helpful to focus on housing market conditions in the neighborhood where you’re looking to buy instead of the broader national trends that might be skewed by data in another time zone. Your down payment needs are going to look much different in Tuscaloosa than they will in Tucson, for example.
“Everyone should avoid averages and look at the specifics of their neighborhood,” says Steinberg. “How many homes are being built? How many homes are on the market, and at what price level and condition? Real estate markets are hyper-localized, and generalities and averages are somewhat useless.”
4. Look for lower down payment loan options
While 20 percent is the ideal amount for a down payment to avoid paying more in interest and mortgage insurance, it’s not a requirement by any stretch, and it’s unrealistic for many to save that much cash. Consider whether you’ll qualify for a low down payment program, even if it comes with mortgage insurance.
“These are designed to help first-time buyers,” says McBride. “While you have to pay mortgage insurance for a few years, the idea is to accumulate enough equity by the time you move up to your second home that you won’t have to pay private mortgage insurance.”
5. Keep closing costs in mind
The down payment isn’t the only piece of the homebuying puzzle you’ll need to solve for. You’ll also need to be ready to pay closing costs — lender fees, taxes, appraisal expenses, settlement charges and more. These add up quickly. In 2021, the average closing costs were $6,905, according to ClosingCorp.
Because you’ll be spending several thousand on closing costs, it’s imperative to stay in the home long enough to break even if you want to stay in the black.
“If you’re buying a home and selling it a year or two later, you’re not going to come out ahead,” says McBride. “Make sure you have a longer time horizon in mind.”
6. Think about the cost of living and where you could put down roots
The headlines about home prices might cause concern right now, but it’s important to remember that high-priced markets do play a large role in the data.
“Buyers can fight inflation on a personal level by moving somewhere more affordable,” says Fairweather. “If they have the flexibility to work remotely, they could start browsing other cities and states on Redfin to see how a lower cost of living can impact their lifestyles.”