The cost of you new home will extend far beyond your initial down payment. Don't forget to also consider the mortgage origination fees, closing costs, principal and interest, homeowner's insurance, and property taxes. Then there are utilities, renovations, home owner's association fees and the typical day-to-day maintenance costs that come with owning a home and replacing items as they age.
Understand Your Finances
Costs of home ownership aside, there's the question of whether you're in a strong position financially to make the purchase. Only after you can check off these items should you proceed:
You're on track with your financial goals. This means you've established and are consistently funding retirement accounts and that you have eliminated all consumer debt or at least have a strong handle on it.
You have a full emergency fund. You have three to six months of expenses stocked away.
Do we know where we'd like to live for the next five years? If you're thinking of relocating or moving, you may want to wait until things are more settled to buy for the long-term. A turnaround sale could have you losing money right off the top.
Do we have job security? If your work is highly unstable, think about how you'd make the payment if you lost your income. If you don't have the funds to cover it or a plan in place, again -- you may want to wait until you're in a more stable situation.
Are we ready to maintain a home on a consistent basis? Plumbing issues, yard maintenance and more come with a house. Make sure you're ready to handle it yourself or shell out the funds to hire those to do it for you.
Do we have a down payment? How much do you need for a down payment on a home in your area and what does that translate into for monthly expense? Make sure you have the cash you need on hand.
You should have at least 20 percent of the home's purchase price saved for the down payment. Any less and you'll likely be paying private mortgage insurance, designed to protect the lender in case the borrower defaults.
Understand How to Save
If you've made it to the point of saving for a down payment, you know that 20 percent of a home's purchase price is a big number. Try one of these strategies for saving up a home down payment:
Establish a special savings fund. This is a big goal that deserves its own savings account. Look for a savings account online or at a local credit union that can offer you a decent interest rate.
Slash unnecessary expenses. Review your expenses and note what you're willing to cut out or reduce in order to save for this goal and reallocate the funds to your new account.
Swap it out. Swap expensive habits for cheaper alternatives, such as dining out to lunch instead of dinner, working out at home instead of at the gym, etc. Track new habits to determine extra funds on hand and transfer those savings to your home down payment fund.
Create a budget and make room for savings. If you don't already use one, establish a budget that includes your monthly down payment savings and stick to it each month.
Keep extra money. Whenever you receive extra cash, make it a rule to put 80 percent into your savings and spend 20 percent on yourself.
Grow your income. If you want to pick up the pace on saving, work overtime, negotiate a raise or establish your own side hustle to earn extra money in your spare time.
You're entitled to a free credit report every year from the three major credit reporting agencies -- Equifax (EFX), Experian (EXPGY) and TransUnion. Go over your report line by line. Do your balances match your records? Are there any claims of delinquencies for accounts you never opened, or late payments you don't remember? If you spot any errors, contact the reporting agencies to dispute them.
Your credit history reflects how responsible you are with your credit. Missing a payment -- or multiple payments -- lowers your score and makes you look risky and unreliable. Set up a system to guarantee you're on time with all future payments. Mark due dates on your calendar or (even better) set up automatic payments from your checking account.
It's not just the fact that a payment is late. Credit agencies also keep track of how late your late payments are. The longer it takes you to pay an overdue amount, the worse the damage it will do to your score, so if you're late on any bills, take care of them as fast as possible.
Credit agencies pay attention to your credit utilization ratio -- how much you owe compared to the maximum your credit cards would allow you to borrow. If you're using most of your available credit, it's time to adopt an aggressive strategy to pay down your balances.
There are two popular strategies. One version of the "snowball method" involves paying off the card with the lowest balance first, then working your way up the line. This gives you the fastest psychological victories from crossing debts off your list, which motivates you to keep going. Or you could follow the traditional snowball method of paying off the debts in order of the highest interest rate first. Resist the urge to play the balance transfer game. Instead, focus on genuinely paying off the balances, once and for all.
As long as you keep adding to your debt, you'll never get ahead, so it's time to drastically reduce how much you charge on a regular basis. Put your credit cards in a drawer or cut them up altogether. Take a red pen to your budget. Get a second job for extra income. Do whatever it takes to stop adding to the balances you're trying to pay down.
It seems counterintuitive, but if you've paid off an account, you should still keep it open. It will show up as "good debt" on your credit history, and the longer you've had it, the better your score. (Note: You can cut up a credit card and still technically leave the account open.) Keep the account "active" by occasionally charging a small amount on it, like your Netflix (NFLX) subscription and immediately paying it off in full. Set up automatic payments to make sure you're never late.
If you have a spotty credit history, it's easier to get a secured credit card, department store card or gas credit card than a major credit card. If you make small charges to it each month and then pay them off immediately, you'll build up a positive credit history and boost your score.
If you're having trouble getting a card of your own, ask a friend or relative to add you as an authorized user to one of their credit card accounts. This is a big favor to ask, though, so make sure to use this privilege responsibly and only charge what you know you can pay off immediately. And don't be offended if the person says no.
Credit card companies are more flexible than you may think -- after all, they want to keep your business and collect your money. So it doesn't hurt to call up customer service and ask about ways you can negotiate your current arrangement. You may be able to get a settlement arrangement that lowers your interest rate or waives late charges so long as you make regular payments. You may also be able to get a certain late charge removed if you can demonstrate hardship and an otherwise decent payment history.
A high debt utilization ratio (using too much of your credit limits) can hurt your score, so if you're able to negotiate a credit limit raise, it could give you some extra points. That said, this is a risky move if a higher limit will only tempt you to spend more, so use it only if you really trust yourself.