So, you’re beginning the wonderful journey of home ownership — welcome to the world of mortgages, down payments, and homeowner’s insurance. As you’re getting ready for the rest of your journey, one thing to look at first is your savings budget. After all, embarking on the homeownership journey without a proper financial plan is like setting sail in turbulent waters without a compass.

A budget can help you gain a comprehensive understanding of your income and expenses, enabling you to identify areas where you can save extra money. This extra money can be channeled into your savings account, supporting your financial health, and growing your down payment fund.

It’s important to keep in mind that saving for a house is more than just saving up enough for the down payment. You also need to account for closing costs, moving expenses, and the inevitable home maintenance costs.

A substantial savings cushion can also help you get approved for a mortgage loan, as lenders often prefer borrowers with solid financial buffers.

What are the costs involved in buying a home?

Purchasing a home goes beyond the listed real estate price. As a first-time home buyer, it's important that you understand all the costs involved.

These include:

  • The down payment, usually ranging from 3.5% to 20% of the home’s purchase price, is the amount you’ll pay to your lender up front.
  • Closing costs, which may include origination fees charged by your lender, title insurance, and escrow fees. They usually amount to 2% to 5% of the mortgage loan amount.
  • Ongoing costs of homeownership, which include mortgage payments, property taxes, home insurance, furnishing costs, and maintenance costs.

One factor that can significantly influence the costs of homeownership is the type of loan that you take out. Along with conventional mortgages offered by banks and credit unions, there are also Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and US Department of Agriculture (USDA) loans you can use to buy a home.

Taking out a conventional loan will usually require a high down payment but have lower long-term costs. On the other hand, FHA loans, VA loans, and USDA loans are often secured with lower down payment requirements but might come with higher monthly costs.

What role does a mortgage lender play in homeownership?

Mortgage lenders are key providers in the homeownership process. They determine your loan amount, interest rate, and the terms of your mortgage. Lenders use your credit score, income, and overall financial health to assess risk and decide on the terms of your loan.

Your lender may also charge origination fees for processing the new loan application. These typically range from 0.5% to 1% of the loan amount.

It's important to shop around to find the best interest rate and loan terms for your financial situation. For instance, a lower interest rate can significantly reduce the total amount you pay over the term of the loan. Keep in mind that while some lenders may advertise very low rates, they may also charge higher origination fees.

How much should you save for a down payment?

The amount you need to save for a down payment varies depending on the home’s purchase price, the type of loan you have, and your lender's requirements.

Conventional loans typically require a down payment of at least 20% of the purchase price if you want to avoid paying for private mortgage insurance (PMI). On the other hand, FHA loans allow down payments as low as 3.5% — but you'll also need to pay for PMI.

How can you save money for a down payment?

Setting a savings goal is a first step in saving enough money to meet down payment requirements. You can open a dedicated savings or money market account for your down payment fund and contribute to it monthly.

You can even set up your bank account to make automatic transfers to your savings account. This way, you’ll be saving money automatically before you get a chance to spend it.

You may also consider boosting your income short-term with a side hustle or by monetizing a hobby. Tax refunds can also be directed to your down payment savings.

Can you use retirement accounts for a down payment?

While using retirement savings should be approached with caution, it may be an option. Traditional and Roth IRAs allow first-time buyers to use up to $10,000 without the early withdrawal penalty, but you may owe taxes. It’s important to be aware of the risks associated with using your retirement savings, and you may want to speak with a financial advisor before making a final decision.

The journey to homeownership requires careful planning and saving. Being prepared financially can help you secure your first home and ensure that the monthly payment is within your budget.

How can you improve your personal finance for homeownership?

Effectively managing your personal finances is a key first step toward attaining your new home. In particular, improving your credit score can help drastically — especially if your credit score is less than ideal.

Mortgage lenders tend to prefer borrowers with high credit scores, as it may indicate a lower risk of default. You can improve your credit score by paying your bills on time, reducing credit card debt, and avoiding new debts.

Student loans can also have a considerable impact on your debt-to-income ratio (DTI), another metric mortgage lenders use to determine loan eligibility. A lower DTI can show that you have a good balance between debt and income, potentially making you appear like a less risky borrower. To manage your student loans, consider loan consolidation, refinancing, or income-driven repayment plans.

How can cutting back on living expenses help you save?

Trimming your budget can free up some extra income to help speed up your savings journey. Look at your living expenses and identify areas where you can cut back. Consider canceling unnecessary subscriptions, meal planning, or even temporarily downsizing your living space.

Refinancing high-interest loans can lower your monthly payments, freeing up cash that can go straight into your high-yield savings account. You can also consider transferring any high-interest credit card debt to a low-interest credit card in order to lower your monthly payments.

Always keep in mind, though, that transferring a balance can come with fees, so ensure the math works out in your favor.

Why is having an emergency fund important when buying a home?

Even with careful planning, unexpected costs can arise. That's why having an emergency fund is key when buying a home. This fund is separate from your down payment savings and is intended to cover unexpected homeownership costs, like emergency repairs.

A fully funded emergency fund usually holds three to six months' worth of living expenses. While it might be tempting to use this money to reach your down payment goal faster, remember that once you are a homeowner, the responsibility (and cost) of dealing with emergencies falls squarely on your shoulders.

Smart financial management, combined with strategic saving, can pave the way toward homeownership. It's a journey that requires discipline, but with diligent planning and thoughtful decision-making, you can achieve your dream of becoming a homeowner.

The bottom line

Effective planning and saving are keys to successful homeownership. They allow you to understand your financial capabilities, prepare for the associated costs, and ultimately secure the home of your dreams without stretching your finances to their breaking points.

If you're ready to embark on this journey, consider joining the waitlist for Vital Card. Vital can be an effective tool in your credit-building strategy, offering features that encourage responsible spending.

Get started on your journey today, and take one step closer to your dream home.


How Much Should I Save for a Down Payment? | Experian

What You Need to Know About Closing Costs | Experian

6 Expenses to Budget for in the First Year of Homeownership | Experian

Understand Loan Options | Consumer Financial Protection Bureau

How to Choose the Best Loan Term for Your Needs | Experian

What Is Private Mortgage Insurance? | Experian

An Essential Guide to Building an Emergency Fund | Consumer Financial Protection Bureau

Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.