If you’ve been hesitant to buy a house, you’re not alone. With skyrocketing housing prices and less-than-ideal mortgage rates, fewer young people have been buying homes in their 20s and early 30s compared to other generations.
But now that the housing market is swinging back into the buyer’s favor and banks are coming up with new ways to determine creditworthiness, now may be one of the best times for millennial parents to consider buying a home.
According to the 2016 National Association of REALTORS Profile of Home Buyers and Sellers, around 35% of buyers were also first-time homebuyers. But before you can officially buy a house, you first need to figure out just how much house you can afford, how much need to save for a down payment, and how to save up for that down payment.
How much house can I afford?
Approximately 88% of homebuyers have a mortgage and, according to NerdWallet, the best way to determine how high of a mortgage you can afford is to use the 36% rule.
The 36% rule states that your monthly mortgage expenses and other debt payments shouldn’t exceed 36% of your gross monthly income. Debt payments include student loans, car payments, and utilities.
While you may be able to lower utilities with maintenance and energy efficiency (HVAC systems need to be inspected twice a year), it’s better to use your average bill for an estimate of what you’d be paying. You can also consider investing more money initially to save on utilities over the long run. One way to do this is to invest in solar panels for your new home. Lasting more than 30 years, solar panels can cut your monthly electricity costs, helping both the environment and your pocketbook.
To calculate how high of a mortgage payment you can afford, determine what’s 36% of your gross monthly income and then subtract your existing debt amount. Let’s say your salary is $40,000 a year ($3,333 a month) and you have $500 in existing debt payments every month. Your projected monthly mortgage payment shouldn’t exceed $980.
How much do I need to save for a down payment?
There are three key factors that impact your monthly mortgage payment: the price of the house, your mortgage repayment plan, and your down payment.
The lower your down payment, the higher your mortgage payment will be. This is because your down payment is a kind of insurance for your lender not unlike the down payment you put on an apartment.
But unlike an apartment, your down payment isn’t used to repair any damage you make to the property. Instead, it serves as a promise that you’re invested and that you’re going to make good on your mortgage payments year after year.
Some conventional bank loans will approve down payments that are as low as 5%. But the average down payment on a house is actually around 15% to 20%. That means if you want to buy a house with a monthly mortgage payment lower than $980 and you want to invest in a home that’s $180,000, you’d want to put down around $36,000.
How do I save for a down payment?
Some homebuyers are able to put down a lower down payment on a house because they choose to invest in a fixer-upper. Fixer-uppers can be great because even a minor kitchen remodel can bring in a return on investment of 82.7%.
However, investing in a fixer-upper also comes with a cost such as needing a new water heater or needing roof repairs. Up to 65% of homeowners said they’re most likely to repair roofs due to weather damage.
So if working on a fixer-upper isn’t right for you, how can you work to save up to buy a house?
First, remember that saving for a down payment will take some time. But you can help to shorten that time by cutting up your down payment into smaller steps.
For instance, if you need to save $36,000 for a down payment and you want to move into a home in the next three years, divide that number by 36. You’ll need to save around $1,000 a month to reach that goal.
While you’re in the midst of saving up, be careful with your online activities. There were about 16.7 million victims of identity fraud in 2017 alone. Not only do victims of identity fraud have their personal information exposed, but their financial means often land in the hands of the hackers as well. If a hacker accesses your checking or savings accounts, they can drain them of your hard-earned money.
You can reach your savings goal by taking on a side hustle, cutting back on eating out, asking for help from relatives, applying for a higher paying job, or moving into a lower-cost apartment. Just remember to plan ahead so you when you do find the home you want to invest in, you don’t make any moves you’ll regret.
