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Posted by Melissa Lynn Galland on Aug 7, 2018 9:08:00 AM
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Purchasing your very first home is one of the most exciting, important steps you’ll ever take. However, the process can be stressful and even scary at times, since there’s so much riding on it. One of the most common questions we encounter from first-time homebuyers revolves around how much to save for their new home.

Although the answer to the question, “How much do I need to save for my first home?” will vary for each individual homeowner, there are several factors that will likely come into play for everyone:

Your Credit Score

Is your credit okay? Good? Great? That three-digit number has a big impact on how much money you need to save for your home, for several reasons:

  • Interest rates: The better your credit, the lower the rate you’ll qualify for. The lower your rate, the less you’ll have to bring to closing for your prepaid interest payment.
  • Private mortgage insurance (PMI) rate: Again, the better your credit, the lower your rate, and the less you’ll need for closing.
  • Your attractiveness as a buyer: If you’re buying a pre-built home in a competitive market, you’ll have to move quickly to secure a lender. But bad credit can hold you back, since lenders may be wary.

The good news is that you can take steps to improve your credit, such as paying off debt and avoiding new lines of credit. You can also look into getting a Federal Housing Administration, USDA, or FHA, loan, which allow for lower credit scores than traditional loans.  

The Cost of the Home

Of course, the price of your home will impact your total closing costs and your mortgage payment. At closing, you have to put down a payment on things such as property taxes and interest, which vary depending on the cost of the home.

The Location of the Home

Throughout most of the country, experts recommend that new homebuyers save up at least 5 percent of the cost of the home for your down payment. However, in very competitive markets, such as New York, sellers and lenders expect buyers to put down at least 20 percent. Do a little research before you start home shopping to see what is typically required in your area.

The Cost of Mortgage Insurance

Most homebuyers who don’t put a full 20 percent down at closing are going to be required to carry PMI that totals anywhere from 0.3 to 1.15 percent of their loan. While that may not sound like much, it could total hundreds or even thousands of dollars a year, so it’s important to consider whether you can afford it. Plus, at closing, you’ll have to bring an escrow deposit and an upfront premium for your PMI.

Of course, you don’t have to have mortgage insurance forever. You only have to pay it until your loan-to-value ratio hits 80 percent. And don’t worry: Many first-time homebuyers end up paying PMI because they simply can’t save up enough money to put down 20 percent. In most cases, it shouldn’t deter you from your dream of owning a home.

In addition to these factors, which are variable, there are a lot of set costs that you’ll have to pay at closing, such as the appraisal and home inspection fees. That’s why experts recommend that buyers save at least 3 to 6 percent of the price of the home for closing. Keep this figure in mind when you’re considering how much house you can afford.

The bottom line is this: If you have solid credit and can save up enough money to comfortably cover your closing costs, then homeownership is within reach for you. However, it’s always best to bring as much as you can to closing, so start saving now. In no time at all, you could be building your dream home.

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