So you crunched the numbers and controlled your emotions; it’s now time to get your new house. But, there is still one major roadblock—the down payment.
Welcome back to the Road to Homeownership series (Part #1, Part #2), where we move into the house of our dreams.
What is a down payment? The bank will only partially cover your home’s cost (not 100%). This would leave them no buffer in case you default on your loan.
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Instead, the bank prefers to pay about 80% of the home value, which grants them a 20% buffer from the start.
There are ways to reduce your down payment if you are a first-time home buyer or meet other income criteria.
But, for the most part, prepare to pay 20% of the house’s value upfront. This amount may seem like a lot, especially considering rising housing costs, but you can achieve it.
Let’s get down to business. You aren’t going to save a house down payment by beating around the bush.
You’ll need to do whatever it takes (legally) to start earning additional income to fund your house down payment.
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I wrote a series on ways to generate enough additional income streams to save for your down payment. Each situation will vary.
- Saving for a House Down Payment #1: Single Person, Small City
- Saving for a House Down Payment #2: Single Person, Big City
- Saving for a House Down Payment #3: Couple, Small City
- Saving for a House Down Payment #4: Couple, Big City
- Saving for a House Down Payment #5: Family, Small City
- Saving for a House Down Payment #6: Family, Big City
The gist of these articles is that you’ll need to rent rooms, start an online business, and invest for dividends to build your income portfolio.
Buying a home isn’t easy, so temper your expectations. If you want a $400,000 home, you may need $80,000 for the down payment.
Accelerated savings. How long would it take you to save $80,000? It depends on a few factors, so let’s take a look.
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Do you have any debt? Debt will hamper any savings program you try to implement. Pay down credit card and student loan debt before savings for a house.
Trying to save 5% while paying 12% is a fool’s errand. Debt is a function of the past and will limit your future endeavors—destroy debt today.
How much do you earn? Do you go to work every day? If so, how much do you make every month?
Can you get a promotion or change jobs to increase your pay? Desperate times call for desperate measures.
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How much do you save? The actual financial test is figuring out how much you save. Are you a spender or a saver?
If you are a spender, it’s time to become a minimalist, at least for the next few years. House prices are through the roof, and there is no time to waste.
Spending money on frivolous things can add years to your savings program. You will have a season for spending but now is not the time.
How much do you pay for your car? Monthly car payments are at an all-time high. Some people are paying more than $1,000 per month.
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In comparison, one of my houses had a monthly payment of $1,000 at once. Things are getting out of hand in the automotive world.
Read “Income Investing vs. Car Payments” to see an alternative to spending so much on your car. At this point, you’ll have to choose between owning a nice car or buying a home.
Buy a house for the right reasons. Everyone wants to own a home, but is homeownership right for you?
Owning a home requires a deep level of commitment many folks may not realize. It will tie you to one place for 5-7 years and require maintenance and upkeep.
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The true costs of homeownership and the value of owning a home may not overlap for you. Do the mental math and emotional reasoning before you try to save for a down payment.
Your efforts will fizzle out if you do not have enough dedication and commitment to your cause. It is simply too difficult to save this type of money without a strong passion.
Get your partner on board. Again, everyone says they want to own a home. But what are they willing to do to earn it?
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You and your partner need to be on the same page from the start. If they are spending money behind closed doors or shopping online, it could derail your mission.
Housing prices increase each year, making purchasing a home more challenging. You have no time to lose. Therefore, you must act as a team to overcome this massive challenge.
Do something extraordinary. There are many ways to accelerate your savings rate. You can invest for dividends or start an online business.
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Consider trading options if you have extreme discipline and good math skills. You can earn 5% returns on your money per month—safely.
That’s a 60% return per year. However, trading options can be akin to gambling in the wrong hands. You have to know your limits beforehand and stick to them.
I have $20,000 in my options trading account and safely earn $1,000 per month against it. I can easily make $5,000 or more monthly, but I would be risking my principal (basically gambling).
The moral of the story is to think outside the box to create an infinite return. You’ll need a wealth generator to push your monthly savings rate above 50%.
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Conclusion. Welcome to the real world, where nothing is given to you. You’ll have to earn your home, so prepare yourself.
Every year, more investors, institutions, and real estate trusts purchase residential single-family homes. This makes them your competition rather than your neighbors.
These entities have deep pockets and access to low-cost leverage (probably 3% loans versus your 7%).
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You need to keep this scenario in the back of your head. You are up against the big fish, and you are a small one.
Work hard to save for a down payment, and perhaps move to a cheaper city. There is no harm and admitting you’ll never own a home in Los Angeles or New York—most people can’t.
Ultimately, the people with the most grit, determination, and financial education will win the housing wars. What side do you want to land on—homeowner or renter? Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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