Budget and Savings Tips for First Time Homebuyers

By: Tinuke | April 6, 2022

If you are a first-time homebuyer and looking for ways to help improve your finances through budget and savings, you're at the right place! This article will explain some of the costs you can expect when financing a home and then show you some ways to create a monthly budget to save for those expenses.

Financing Costs

If you plan to get a mortgage to buy your first home, there are some costs and fees associated with the mortgage. Every lender is different so the fees will be different. However, there are some basics to creating a budget and plan for this purchase. For example, you will need to plan for a down payment, closing costs and 'cash reserves.'

Down Payment

A down payment is the amount of money you pay upfront to reduce the mortgage amount that you borrow. Most lenders require a down payment of at least 3-5%. The more money you can put down, the less your monthly payments will be.

Closing Costs

Closing costs are fees charged by the lender and other service providers when you close on your home loan. These costs usually total 2-5% of the purchase price of your home.

Cash Reserves

When you get a mortgage, the lender will want to see that you have enough 'cash reserves' to cover three months of mortgage payments. This means if something unexpected happens and you can no longer make your mortgage payments, you will have enough savings to cover those costs for at least three months.

Creating a Budget

Once you know about the costs associated with buying a home, you can start creating a budget to save for them. Here are some tips on how to do that:

First, find out your net (after-tax) income. This is the amount of money you actually bring home each month after taxes are taken out. It is important to know your NET income because as a homeowner, you want to be sure you have funds available for unexpected homeownership expenses. If you base your budget on your GROSS income, you will be disappointed when your paycheck comes.

Second, list your monthly expenses. Make a list of all of your regular expenses, such as rent payments, car payments, utilities, groceries, etc. Be sure you list EVERYTHING.

Third, subtract your monthly expenses from your net income. This will give you the amount of money you have left each month to save. Does it look short or are you upside down? Then you need to adjust!

Fourth, do a 'needs vs. wants' analysis. To budget means to track and plan. You really need to dive into what you are spending money on that is necessary and what is not. Do a line-item inventory of where your money goes. Figure out what is a need (power, shelter, food, and transportation) and what is a want (Netflix, Starbucks, eating out every night). Then make a deal with yourself to cut back on the wants.

Fifth, decide how much you want to save each month. It is a good idea to save as much as you can so that you can cover your down payment, closing costs and cash reserves. But, if that's not possible, start with at least $100 per month.

Sixth, create a savings plan. Figure out how long it will take you to save the amount of money you need based on the amount you are able to save each month. For example, if you need to save $10,000 for a down payment and can only save $100 per month, it will take 100 months (or 8 years, 4 months) to save enough money.

If eight years is too long, then you may need to find creative ways to make some additional income or ask about first time buyer grant and gift programs through your lender.

Stick to your budget! It can be tough, but if you want to buy a home, it’s important to make sacrifices and live within your means. Homeownership is one of the clearest paths to wealth and the initial sacrifices can be worth it!

Saving Tips and Tricks

There are a lot of different ways to save money. Here are some tips and tricks that can help you get started:

1. Automate your savings. Have your bank automatically transfer a set amount of money from your checking account to your savings account each month. This will help you to avoid spending the money and will make saving easier since you won't have to remember to do it yourself.

2. Find cheaper alternatives for your regular expenses. If you can’t afford to pay for something outright, look for a cheaper alternative. For example, if you need to buy a car, but can't afford a new one, consider buying a used car instead.

3. Stop using credit cards! Credit cards can be very tempting since they offer easy access to money. However, if you’re not careful, you can quickly get into debt. It’s better to use cash or debit cards so you can only spend the amount of money you have available.

4. Get creative! There are a lot of ways to save money if you’re willing to be creative. For example, you can buy used furniture, cook at home instead of eating out, or carpool with friends.

5. Join a savings club. A social savings club is a group of people who get together and save money weekly, bi-weekly, or monthly to reach their financial goals. An example of a savings club is called a Susu. The group agrees on how much will be saved or contributed to the account and they designate a person to manage the money. The payout is distributed each week to a different member in rotation, until everyone receives a payout. Another example, is setting up an account for holiday funds like a Christmas fund or some other financial goal. Many banks offer savings clubs. These are accounts that you set up to automatically deduct from your checking and deposit into a savings account for a particular purpose. It could be for a holiday or a new car. These can be great ways to make saving easier since you will have someone to help keep you accountable. If you can’t find a social savings club, you can always start one. Just be sure that you trust who is managing the account.

Saving for a down payment, closing costs and cash reserves can seem daunting, but by creating a budget and sticking to it, you can make it happen! Use these tips as a guide and you'll be on your way to homeownership in no time!