The following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy!
Purchasing your first home is a huge milestone and the ultimate sign of adulthood. Many people like homeownership over renting because it allows them to have more freedom over what they can do with their home.
With that being said, home ownership is quite expensive, and according to Apartmentlist.com, of the millennials who want to be homeowners, a whopping 79% can’t afford it.
This is due to a variety of factors including the cost of living around the U.S. If you live in a busy metropolitan area, houses may be expensive near you.
Not to mention, you may need a sizable down payment to purchase your home. It’s best to put at least 20% down if you want to avoid paying private mortgage insurance.
But if homes are priced around $250,000 in your area for example, that can mean you’ll need a down payment of around $50,000 which is a huge amount to someone who has student loans and an annual salary around $50,000.
Needless to say, purchasing a home is hard for millennials from a financial standpoint which causes them to rent longer than they wish. If you’re trying to come up with a way to afford your first home, here are some options to help you come up with a down payment.
Get an FHA Loan
I wanted to mention FHA loans early on because you don’t absolutely need to put 20% down on your new home even though it’s highly recommended. The Federal Housing Administration is a government agency that helps homebuyers (especially first time home buyers) get approved for a mortgage.
With an FHA loan, you are only required to put down at least 3.5% as long as you are a first-time homebuyer or military service member. While this type of loan helps make owning a home much more affordable for millennials, they’ll need to find a property that accepts an FHA lender first.
Also, putting less than 10% down on your home can be risky because you won’t start out with much equity. If the value of your home started to plummet and you barely put 4% down, you may be underwater for a while.
Also, when you put less than 20% down on your home, you’ll need to pay private mortgage insurance (PMI) which can add to the cost of your mortgage even though you can probably get rid of it later.
Given all the downsides of using an FHA loan, it’s still a solid option for millennials who don’t think they’ll be able to afford a home anytime soon. Plus, if you are planning on getting a starter home to occupy only for a few years, you might want to use the FHA loan since it won’t be available to you if you purchase a second home later down the road.
If you are not sold on the FHA loan yet or would prefer to consider other options to help you come up with a 20% down payment, here are some alternatives.
Extend Your Timeline
If you can’t afford a home right now but really want to be a homeowner, it can be hard to extend your timeline but it can allow you to save up enough money and make a wiser purchase. If you have kids, debt, or other expenses like planning a wedding, for example, it’s best to tackle one major goal at a time so you can dedicate all your attention to it.
It’s important to determine what your budget is for a home and how much you’ll need to put down. Then, set a timeline based on how much you can afford to save each month and not your emotional connection with a pretty home across town.
For example, if your budget for a home is $200,000 and you’d like to purchase a house in the next 5 years, that means you’ll need to save $40,000 for your down payment or $8,000 per year which adds up to $666.66 per month.
Let’s say you don’t want to wait 5 years and think you can do it in 4 years instead. That’s $10,000 that you need to save every year or $833.33 per month. It can be doable if you split that monthly amount with your partner and your income and living expenses can support that goal.
Cut Down on Living Expenses
Cutting down on living expenses is one of the best things you can do to boost your savings so you can reach that 20% down payment. You may want to cut or reduce smaller expenses like cable and other subscriptions, your shopping budget and other impulse purchases, and your daily coffee habit.
You can even cut larger expenses like your current living expenses. Living in a basic apartment that falls way below 30% of your income can help you save a ton or you can even become a one car family or see if you can move in with your parents or other relatives in order to save more.
Live on One Income
If you want to purchase a home with your significant other or spouse, you can leverage both of your incomes to help you reach that goal quicker.
Living on one income and using the other income to save is a strategic way to round up enough money for a 20% down payment.
My husband and I started living on one income when we got married and as a result, we paid down $4,000 in debt within our first 3 months of marriage.
You may need to cut some of your expenses and make some sacrifices to make it work, but you can start out by saving the lower income and living off the higher income.
Start Side Hustling
If you’ve cut expenses all you could and still need money to live off, you can always try to earn extra money through a side hustle. If the income from your full time job isn’t getting you to your goal quick enough, look into freelancing your skills whether it’s freelance writing, graphic design, photography, dog walking, or babysitting.
There are tons of things you can do in your spare time to earn extra money and you can throw all your earnings toward your down payment fund.
Again if you are planning to purchase a house with a spouse, both of you can establish a side hustle so you can earn twice the amount of extra money and avoid burnout.
When my husband and I were planning our wedding, I did freelance writing and blogging as a side hustle and he tested websites online and took surveys. Now, he is looking into becoming an Uber driver to earn extra money so we can pay off our debt quicker.
Use Extra Lump Sum Payments
If you receive any extra lump sum payments like a tax refund, bonus at work, or commission, you can put it directly in your house down payment fund.
If you have a birthday or special event coming up like a college graduation, you can request that family and friends make a contribution to your house down payment fund instead of buying you a gift.
The money can really add up.
How about you all? Can you think of any other great ways to save up for a down payment on a home? What has worked for you in the past?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/76657755@N04/6881505052/
