Prepare to buy a home in 4 steps

If you Google "First time home-buyers help", you'll be swarmed by articles and advertisements claiming to have the answer. They fight for your attention, like two dogs playing tug-of-war with a rope and you're the rope. You feel pulled between a lot of different "answers" and "solutions". They're not all bad, but they often don't cover the entire process. You get served a meal, without an appetizer. I'm going to serve you the appetizer and explain today how you can prepare to buy a home. In this post, you'll learn about what you can afford, how to save for for a home, and how long it will take.

I broke down the process into 4 simple steps. If two people went through these 4 steps individually, they both would come out with different answers. My point being, these steps are tailored for you and your situation. They're not hard-rules, like a lot of financial-guru's preach. I like to keep things dynamic and adjust to your situation. So, let's get started!

Step 1: How much can you afford? 
I want you to head over to Chase's mortgage calculator. Then, fill out the form like this:

• Loan term - 15 Years
• Monthly Income - You (and your spouse's) combined monthly income, before taxes. If you know your annual income, just divide it by 12.
• Monthly Expenses - Only include your debt here. Don't include things like, rent, utilities, cell phone bill, etc. If you don't have any debt, place $10 in this box (Chase doesn't let you put in 0).
• Down Payment - I recommend using 5% or higher. Using just 5% is fine too.
• Interest rate - Use 3.13%. If you want something super accurate, just Google "15 year mortgage rates"
• Property Taxes/Fees - Use 5%
• Property Insurance - Use 3%

I filled out this form for a hypothetical couple that makes a combined $90,000 per year ($7,500 per month before taxes). This couple pays $300 to debt each month. They chose to have a 5% down payment.

Don't worry about the results yet, just fill out the form :)

Step 2: What's your timeline? 
Next, what's your timeline? Your timeline isn't when you want to move into your home. Rather, it's when you want to have the available funds. Most likely, you'll move into your home 1-3 months after you save the enough funds.

I recommend choosing a time span, i.e. not a target date. It makes the math easier. So, for our hypothetical couple, let's say their time span is 2 years. If you want to, you can choose a target date. For example, "I want to save enough for a home by January 1, 2021."

Step 3: Calculate!
Alright, now for the fun part! There may seem like a lot of steps, but I purposefully broke it out to keep things simple. I'll first summarize the steps, then show you how our hypothetical couple would calculate it. If you're not the greatest at math, I'll help you out. Just message me.

1. Figure out your budget cycle. You don't have to actually be budgeting yet to have a budget cycle. Most people just match their budget cycle to how frequently they get paid. If you have a spouse, typically it's matched to the spouse with the greater income (if the spouses aren't paid at the same time intervals).
2. From "Step 2: What's your timeline", how many budget cycles would you go through? So, if you get paid monthly (i.e. your budget cycle is monthly) and your timeline is 2 years, then you would go through 24 budget cycles. 2 years = 24 months. 24 months = 24 paychecks = 24 budget cycles. 
3. Do you have any funds already saved for a down payment? If so, figure out that number and write it down.
4. Now, we'll calculate the amount of money you have to save per budget cycle. Take the down payment amount from the Chase mortgage calculator (shown on the right side under "down payment"). Take this number and minus your funds for your down payment. Then, divide it by the amount of budget cycles you would go through.
   Savings Per Budget Cycle = (Down Payment - Saved Down Payment) / Total Budget Cycles.
5. Add estimated closing costs. To estimate your closing costs, take your estimated home price from the calculator and multiply it by .035, then divide it by your total budget cycles.
   Monthly Savings = Savings Per Budget Cycle + (Estimated Home Price * .035) / Total Budget Cycles.
6. Save your money in an account that would keep it aligned with inflation and more importantly average home growth. You can read this post about where to put your emergency fund for an idea of how to get started and different options you have. You can follow a similar strategy. You can take a little more risk with this money than an emergency fund, so I would say investing in mutual funds is fine and something I would recommend.

The Monthly Savings is the amount you'll need to save per budget cycle. This number might be a lot higher than you expect. I want to encourage you to not feel fearful. It will be overwhelming, but you have full control over your finances. You can figure out how to make that number work. I can help too. Reach out to me and we can figure out how we can make it work.

Now, let's go through these steps for our hypothetical couple. Remember, our couple makes a combined $90,000 per year, with $300 debt payments per month. 

1. Our couple gets paid biweekly, i.e. 26 times per year.
2. Our couple has a goal to have the funds for a home in 2 years. So, our couple would go through 52 budget cycles (26 budget cycles per year * 2 years = 52 budget cycles).
3. Our couple hasn't started saving yet, so this is $0. 
4. Our couple's estimated down payment needs to be $10,585. We divide that by 52. So, our couple starts with $203 per budget cycle. ($10,585 down payment / 52 budget cycles = $203 per budget cycle).
5. Now, our couple needs to add in estimated closing costs. Their estimated home is $211,693. They multiply that by .035 to get $7,409. Then, they divide it by their total budget cycles to get $142. They add this to their savings per budget cycle to get a final Monthly Savings of $345. In other words, our couple would need to save $345 per budget cycle to afford their home.
6. Our couple decides to save their money in a low cost mutual fund. They reached out to me to help them choose one that best fit their risk tolerance :)

Step 4: Make adjustments
We're finally ready to make some adjustments if needed! If your Monthly Savings is way too high, you can make adjustments in a number of ways. You can make your debt lower (i.e. lower your Monthly Expenses in the calculator) and it will lower your Monthly Savings. You could do a 20 year mortgage, or 30 year mortgage, and it would lower your amount. If you changed this, you would also have to change your interest rate to something higher. You would also be have to buy a home less than the new estimate. 

Really, you probably don't need many adjustments. You will be in a very good spot financially if you just generally follow steps 1-3. They'll already be customized for you, since everyone has different numbers and goals.

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I'd be happy to help you go through these steps. Just message me the numbers for the Chase calculator and I'll go through all the steps for you and message you the results. I hope this helps with your first home. Thanks for reading Better Budget!