How can I budget to build up a down payment for a house over the course of a year?

Question

I'm currently looking to buy a house in one year - my lease will be expiring, I'll have the time to build up a savings, and we'll have the time to research and find the exact house we want - we've already seen several that we would like, and we both agree that we want to move out as soon as possible, though right now with only $500 in Savings (total), that's not really feasible.

I've paid off my student loan, so my major outstanding obligations right now are:

• Car Payments $187/mo + $66/mo for insurance and ~$30 for Gas ($283/mo)

• Electric $100/mo

• High-speed Internet, $65/mo

• Phone $135/mo Phone

• Rent $1,350/mo.

• Food bill ~$100-$150/week ($500/mo)

• $50 a week or so for luxuries like ordering out or going to a restaurant ($200/mo)

So my total monthly expenses are roughly $2633, not including any emergencies.

My take home is $1950 every 2 weeks (So roughly $3900/mo after taxes, health insurance, et cetera from my work). This is our only steady income, with some minor income every month or two from my wife doing art commissions.

We're looking for a 3 Bedroom house with a finished basement and modern kitchen. We're willing to settle for 2 Bedrooms if there is also a finished basement, so long as the upstairs has a decent size to it. We'd prefer a Ranch house too. In our area, this looks to run us between $200,000 - $250,000.

What can we do to save up a down payment and cover closing costs for this kind of home purchase? We'd prefer to do it in a year if possible, but any advice would be appreciated - and if we can't, we're willing to downsize to get out of our current apartment next year.

Answer 1

You list about $2500 per month in expenses (rent, utilities, etc.), and say you have $3900+ in income per month. This leaves you $1400 per month. If you add this amount to your savings every month, you will have a bit over $17,000 saved in a year.

You mention getting paid every two weeks - this usually works out to two months per year with an "extra" paycheck (3 payments fall in a single calendar month instead of the usual 2). If you stash this entire amount of extra money ($3900) with the rest of your savings, that'll get you to about $21,000 saved in a year (including the above-mentioned saving).

This is about 10% of the (lower end of the range) purchase price you're expecting. It's generally a good idea to have at least 20% as a down payment. I'd recommend the considering the following options:

• Save as I've outlined above, but wait 2 years instead of 1 year to buy. This will allow you to save a 20% down payment (more likely to get approved for financing, not have to pay PMI)
• Save any extra income from your wife's art commissions towards the purchase; depending on size and frequency of commissions, this could be a significant or minor acceleration.
• Sell/trade your car and get something cheaper. Whatever cash is left over from the trade, add to your savings. Add what you would have been paying for the car each month to what you are saving for the house.
• Buy a less expensive house.

The numbers and timeframe you've outlined may work, but depending on your credit, it might be difficult, impossible, or expensive to get financing for the purchase with the down payment you will have saved in a year. If you're set on the timeline, find a cheaper house; if you're set on the house (not a particular house, but the size/style/neighborhood/etc.), extend your timeline and save as much as possible (including downsizing on your apartment/car).

Answer 2

• 20% of $250K is $50K.

• 1/12 of $50K is $4,167.

• Your monthly take-home is about $3,900.

Basic math says that there's no way you're going to make the 20% down payment that we recommend.

Even 5% of $250K is $12,500.

If your expenses are really $2,630/month, then you're saving $1,270/month which is just over $15,000.

Add in the extra two paychecks ($1950*2=$3900) and you're just short of $20,000.

That's good. However, there are closing costs, realtor costs (if you use a realtor), moving expenses, "make it livable" expenses, etc.

You should probably save for two years after you ensure that you have a $2600*6 = $15,600 emergency fund.

Answer 3

What can we do to save up a down payment and cover closing costs for this kind of home purchase?

Many people track expenses, but don't really budget. Budgeting is a great way to achieve financial goals. The best budgets, in my opinion, are known as zero-based budgets where every incoming dollar is given a specific purpose ahead of receiving it. I suggest a written/electronic budget that includes all your expenses, discretionary spending, and saving for specific purposes (emergency fund, down-payment), include expense categories like car repair/maintenance and do your best to find the average monthly spend. It doesn't need to be inflexible, you'll adjust as needed, but a written plan is more likely to be followed than simply trying to save all extra money for a house.

If very motivated to get into a house in a year, you can cut spending to the bare essentials and increase income by taking on additional work.

We'd prefer to do it in a year if possible, but any advice would be appreciated - and if we can't, we're willing to downsize to get out of our current apartment next year.

Others have parsed the numbers, you could buy in a year with PMI at current income/expense levels, that's not ideal. However, it's worth evaluating the market you'll be buying into. Home prices in my area have been on a 10-year tear, waiting a year to avoid PMI can mean paying significantly more for a house. If you did buy with PMI you'd want to ensure your mortgage provider makes it easy to remove PMI without refinancing. My first home purchase was 5% down with PMI, the PMI got removed in 18 months, waiting to buy would have cost me much more than the PMI did. My situation was not typical, but it's worth considering in 'hot' markets.

The main thing I'd caution against is buying without additional savings on hand, big things can go wrong immediately after moving in, so you need a good pile of money on hand just in case, you'd ideally have a ~6 month emergency fund and a 20% down payment.

Answer 4

Other answers here have focused on a 20% down payment, which is really ideal, but in reality you should speak with a lender and run the numbers and see if maybe a lower down payment with mortgage insurance is better for your situation. Mortgage insurance isn’t ideal, but even the little bit of principal you’ll be paying might offset the PMI and make it worthwhile to buy sooner than later. Not to mention that with how high interest rates are on online-only savings accounts right now you might be better off putting that extra cash in there and use the interest to offset the PMI and having some extra liquid cash just in case.

The extra costs of PMI might also be something you’re willing to accept if it means you get to own your own home a little sooner; it was sure worth it for us.

Having just purchased our first home we were a little surprised to realize that closing costs were going to be around another 3% of the purchase price on top of the down payment, so keep that in mind.