Budgeting to buy a home might not sound like an exciting activity. But in fact, it can be fun and empowering. The fun comes from setting goals, monitoring your progress and celebrating your success. The empowerment comes from knowing how much you can afford to spend to buy a home and how much you need to save for your down payment.
The first step is to mentally reframe how you think about budgeting.
"People hear the word 'budget' and it's a turnoff, so I talk about 'purposeful saving,'" says Rick Vazza, a financial advisor at Driven Wealth Management in San Diego, Calif.
Set your savings goal
Purposeful saving starts with knowing how much you need. To find out, you'll need to talk with a mortgage broker, says Heather Townsend, owner of Townsend Financial, a financial planning firm in Kirkland, Wash.
A good broker can give you an estimate of how much you can qualify to borrow.
Once you have that amount, you should think about whether the payment will be affordable for you. Just because you've been approved doesn't mean you'll be comfortable, says Sahil Vakil, CEO of Myra Wealth, a financial planning firm in Jersey City, N.J.
Get set to save
With a loan amount and down payment goal in mind, you can start saving and shopping for a home you can afford. Sticking to your budget gives you confidence and helps you focus on homes that you like and that are within your means.
Brian Hoffman, an executive with Northbrook, Ill.-based builder Red Seal Homes, advises buyers to compare builders' standard features, paying extra attention to big-ticket items like cabinets, flooring and countertops. If the standard features fit your expectations, you should budget 4 percent of the home's purchase price for changes and upgrades. If you're looking for a more stylish home, budget 7 to 8 percent.
While you're shopping, collect images of homes you like so you can create a vision board of what you want in your new home. A vision board is an "amazing date night activity" that can motivate couples to save, Vazza says.
There's an app for that
Rather than letting your down payment savings slosh around in your checking account, open a dedicated savings account and give it an appropriate nickname like "down payment savings." A separate account lets you watch your savings grow as you get closer to your goal and helps you focus on what you're getting, not what you're giving up.
A fun way to boost your savings is to use a mobile app to transfer money you're not spending into your savings account on the spot. Suppose you normally spend $20 for drinks when you eat out. Instead of ordering those beverages, open your app and transfer the amount you didn't spend into your down payment savings account.
"Instead of just not spending—because that doesn't sound fun—you can say, 'We put that money in our down payment account,'" Vazza says. "It's instant gratification."
Another good strategy is to figure out your time horizon to buy a home and divide that number of months into your savings goal to create a monthly savings target. For example, if your down payment goal is $25,000 and your time horizon is five years, you'll need to save $417 every month [25,000 / (5 x 12)] to get there.
The investment option
Dividing your savings goal by your time horizon doesn't account for interest income or investment gains that could help you reach your goal sooner.
Vazza suggests it's worth having a conversation about potentially investing your down payment savings. Investment comes with risk, however, so you should ask yourself if you'll be comfortable waiting longer to buy a home if the stock market declines and your investment loses value.
Townsend suggests putting your down payment savings into a high-yield savings account. With this strategy, you could earn a bit more interest income without the risk of a stock market correction.
One advantage of budgeting, saving and investing to buy a home is that you'll be set up to continue budgeting, saving and investing once you become a homeowner. These good financial habits can help you not only buy a home, but also manage homeowner expenses like property taxes, insurance and maintenance and repair costs.
If your time horizon is longer than one year, you should revisit your down payment savings goal at least annually and make any necessary adjustments due to changes in your income, expenses, family size, lifestyle or time horizon.
"This isn't something that you just set up and leave it alone," Vazza says.
Now, get ready, get set and start saving. You'll soon be in good shape to buy a home you'll love and can afford to own.