It’s an exciting time to be a first-time homebuyer in Arizona! But all of the jargon surrounding mortgage loans can be overwhelming. Knowledge = power, especially if you’re new to the market. Here are the basics on what exactly you’ll need to save up for before you buy a house.
First-Time Home Buyer Savings Goals:
First-Time Home Buyer Savings Goal #1: Down Payment
Depending on the type of mortgage loan, you might be needing anywhere between 3.5% and 20% of your home's purchase price. On a $200,000 home, this would be anywhere from $7,000 to $40,000 to cover your down payment. FHA loans require a minimum of 3.5%, while Conventional mortgage loans require 5%. It’s good to remember that the more you can put down at the beginning, the less interest you’ll pay over the life of the loan.
Other less common mortgage loan options include the VA and USDA loans. VA loans are available only to members of the military, offer 0% down payment options, but have other pros and cons to consider. USDA loans apply only to those who live in rural areas, but also offer 0% down payment. Research these if they apply to you!
Other creative options for coming up with a down payment as a first-time home buyer include:
- Gift funds from a family member
- Gift letter & funds verification required
- Down payment assistance programs
- Qualify based on income
- First-time home buyer options
- Penalty-free IRA withdrawal
- Up to $10,000
- Penalty-free IRA withdrawal
- Arizona Home Plus Program
- And others!
Not ready for this sizeable down payment yet? Start saving today. A sub-savings account like this one named with your goal, i.e. House Down Payment could motivate you to set aside that extra five bucks every week instead of spending it at the Target Dollar Spot.
First-Time Home Buyer Savings Goal #2: Closing Costs
Savings needed to purchase a home don't stop with the down payment. You will also need to cover closing costs. You will receive an estimate of these from your lender prior to closing, but plan to pay between 2% and 5% of your loan amount towards closing costs.
Closing costs usually include:
- Loan Origination Fee
- Between 0.5% and 1% of purchase price.
- If you can find a mortgage lender who offers no origination fee, you’ll save yourself an average of $2,500.
- Initial Escrow Deposit
- Depends on your estimated taxes and insurance for the property
- Estimate for this can be found on your Loan Estimate document, Section G, Page 2, given to you by your mortgage lender.
- Appraisal Fee
- Ranges between $250-$600
- Title Search Fee & Insurance costs
- Vary by region
- Title fees can also include Transfer fee, Recording Fee, and Escrow Fee
Sometimes you’ll be required to pay closing costs when you sign your final paperwork as an additional out-of-pocket expense. Other times, you’ll have the option of wrapping the bulk of those costs into the amount of the loan. Be informed when you make this decision, because if closing costs are looped into your loan, you’ll be paying interest on that amount over the life of the loan, in addition to the cost of the interest on the principal loan amount.
First-Time Home Buyer Savings Goal #3: Move-In Costs
After closing your loan, you shouldn't owe the bank or title company any additional money (except, of course, for your monthly mortgage payment).
But don’t forget what you’ll need for moving expenses: between transporting belongings and buying new furniture, to slapping on coats of new paint and updating the light fixtures to LED, you’ll have plenty of costs once you’re in your new home.
Keep in mind what type of home you’re buying, because this will affect move-in costs. They can range from several hundred to several thousand dollars.
- For a brand new build/turnkey residence:
- You’ll probably have less cosmetic work to do to the property and need to think more about moving costs and furnishings.
- For an older home:
- Significant updates may be necessary, but could be spread out over time depending on your situation.
- For a fixer-upper
- Not for the faint of heart, but very rewarding once complete! This is when you’ll want to have a big chunk of change set aside to get your new house in functioning order.
First-Time Home Buyer Savings Goal #4: 1st Payment + Utilities
Don’t make the mistake of putting every penny in your bank account towards down payment and closing costs. In addition to moving costs, you’ll have to cough up your first mortgage payment plus utilities within about a month of closing on your loan.
Consider these when coming up with your figure:
- Estimated monthly mortgage payment = Principal + Interest + Taxes + Insurance + HOA fees (for some homeowners)
- Use a calculator like this one to run different sets of numbers based on loan size/term and other details
- Or, ask a mortgage specialist to crank out the estimates for you. A quality mortgage specialist can do this before you even get prequalified or do a mortgage loan application.
- Estimated utilities: water & sewer, trash & recycling, electric, gas, etc.
- Try asking current homeowners in the community you’re considering their average payment for water/sewer, trash, and electric or gas.
- Research averages online
As a good rule of thumb, you should aim to have the above revolving housing expenses take up no more than about 25% of your monthly take-home income. This leaves you room in the budget to put money toward other items such as transportation expenses, medical costs, emergency savings, vacation savings, clothing, groceries, and entertainment.
Pro tip: Before you start looking for homes, you should have a firm maximum house price set in your mind, along with its corresponding monthly payment. This is likely not the same as the maximum your lender preapproves you for. Lenders can often approve you for more than you’re willing to pay on a monthly basis, so keep this in mind.
First-Time Home Buyer Savings Goal #5: Home Improvement and Repair
Plan to set aside between 1%-3% of the home’s value per year in a savings account for home repairs and improvements. When trying to set that goal amount, consider the age of the home, anything that comes up on the inspection or appraisal reports that won’t be fixed by the seller before closing, and any personal goals you may have for the home. For instance, if you have a personal vendetta against popcorn ceilings and are buying a home built in the 80s, factor in what it will cost to get that removed – or the time it will take you to do it yourself.
Leaky faucet? Heat-proof windows? Roof repair? New AC? They tend to add up pretty quickly. Here are some home improvement project estimates you might be interested in. Experts agree that you don’t want to wait to get problems fixed. A small leak in a pipe, left alone for 6 months, could lead to rot under the flooring. Guess which problem is cheaper to fix?
Luckily, you have time on your side when it comes to this fifth savings goal. Once you’re in your new home and have taken care of any pressing repair needs, you can simply calculate a monthly amount to put aside in a sub-savings account and then forget about it…until you need it.
Bottom Line = Savings matters!
Hopefully, these five savings goals have helped you to feel more confident entering the first-time home buyer realm. Yes, it’s a lot of money to put away, but it’s worth it. Start today and you’ll be surprised how quickly those funds add up!
Want more info on buying a house as a first-time home buyer? Check out our ’First Time Homebuyer? 10 Keys to Success’ post.