When you’re thinking about investing in a home, the biggest question on every potential buyer’s mind is likely the same – how much money do I need? This is especially true for first time buyers about to make the big switch between being a tenant and being an owner. Here’s a handy guide to get you started on figuring out what can you afford, how to save, and what is a solid investment.
The 28/36 rule
First thing’s first – what’s your budget? Time Magazine’s Money 101 column suggests that your home should cost no more than 2.5 times your annual salary. If you make 80K – your budget should be 200K. If you make 100K, then it’s 250k. You don’t want to go for anything too far outside your budget. When you’re applying for a mortgage, Time suggests remembering the 28/36 rule – housing costs should only take up 28% of your gross monthly income, and total debt no more than 36%.
How much do you need to save?
So, now that you’ve figured out what kind of mortgage you’re budgeted for, how much of a down payment do you need to make? Money Under 30 suggests that saving for a 20% down payment is the standard. From there, you have to figure out how much you need to save to reach that goal. It’s possible that some money you already have put aside, such as an RRSP, can be used to finance your down payment. In Canada, this is part of the Federal Government’s Home Buyers Plan. In the US, you may be able to make as little as a 3.5% down payment if you’re a first time home buyer who qualifies for a Federal Housing Administration (FHA) loan, although you’ll have to pay mortgage insurance premiums.
Set a timeframe
Now that you know exactly how much you need to save, it’s time to think about how long you need to save for. Before saving, it’s important to get your financial affairs in order, and pay off outstanding loans and debts, as a higher credit rating will get you a more favorable mortgage. After this, choose a method of saving you can stick to, and do it each and every month. If you’ve decided to save 10% of your salary every month – stick to it. WhichMortage.ca suggests you pay yourself the 10% like an employee, by putting it aside as soon as your paycheck comes, and making due with what’s left behind each month, although sometimes that means tightening your belt.
While saving for your first home can seem overwhelming, it’s a lot more do-able than you may initially think. With a little discipline and a strong goal in mind, you may soon own the home of your dreams!