Buying Your First Home: How to Save Up a Down Payment

I grew up in a family that owned homes. My parents found this to be one of the ways that they could get ahead financially. My parents both worked, but with neither of them having a four year degree, they were forced to rely on their hard work and experience in their fields. To earn some extra equity in the homes, they personally remodeled their first three homes. They did pretty well for themselves this way. This is the environment that I grew up with.

As a result of my parents owning a home, I have always know that home ownership is for me. That and the 4 years of renting is enough for me. I've had enough. While it is our only option at the moment (and will be for the next 2 years or so), my wife and I are looking forward to buying our own home.

The house that I can afford today' It's time to save!

How to Prepare for Buying Your First Home

Buying your own house is no small decision. It requires a lot of preparation and financial security to do it safely. That is why we are preparing years in advance, to make sure that we do it properly. What some people don't realize is that buying a home is a huge change. It's not just like buying a car or an iPhone 5. This has huge implications on your future, so you better do it right.

In order to appropriately prepare for buying your first home, without even including the selection process, there are several things you need to do.

• Learn about the Home Buying Process - I've heard lots of stories of people jumping into buying a home without doing adequate research. Maybe I am a bit old fashioned, but I am going to read several books and blogs about buying a home before I commit. I don't want to get in the middle of the process only to realize I owe more than I expected.
• Determine the Amount You Can Afford - One of the first things you will want to do when thinking about buying a home is get approved for a loan. Lenders will use a formula based on your earnings and other debt to determine how large of a loan you qualify for. Don't mistake this amount for how much you can afford. What you can afford and what you are approved for are two different things.
• Add Closing Costs to Your Calculations- Too many people are surprised by all of the fees associated with buying their first home. It isn't just a down payment and monthly mortgage payment. There are inspections, appraisals, and all sorts of other fees that I don't have memorized yet.
• Get Life Insurance - This may sound strange, but if you don't have any life insurance and you are getting ready to take on a lot of debt, you should make sure that you are adequately covered. The last thing that you want to happen is to have something happen to you and leave your loved ones with the burden of a home they can no longer afford.
• Save Money - After doing a lot of planning, there's perhaps no more important aspect of preparing than actually doing the work to get your finances in order. This means saving up a down payment and enough for the closing costs. It won't hurt to be over-prepared.

Different Paces to Saving a Down Payment

Saving up money for your down payment can be a challenging task, especially for first-time home buyers. You are already paying for your day-to-day expenses which includes your rent. How are you supposed to be able to afford saving up 20% for a down payment on your first home. This aspect is often what keeps people from buying homes. It's hard to do. Difficult, but not impossible. Depending on your time frame, there are three major tracks to saving a down payment for your first home.

• Aggressive Saver ' Call it aggressive or desperate, but these are the people who are on a tight schedule. Whether it is trying to get in your home for a baby on the way or you are just that ambitious, this is the fast track to buying a home. If you are following this pace to saving up a down payment, you put all other savings and investments on hold. You prioritize saving up the down payment over everything else, including unnecessary expenses because you know that the faster you save, the quicker you are in your own home and building equity.
• Diligent Planner - This is how I would classify myself. This pace has a clear goal in place, but the time frame isn't as tight. You have time to still invest while you are saving up extra money for a home, but you may reduce some expenses to expedit the process a little bit. Depending on your time frame, you may even use some conservative investments to grow your down payment faster. The longer time frame takes away less stress, but delays the time to build up equity in a home.
• Noncommittal Saver - These are the people who have no concrete plans to buy a home. It's a loosely-defined goal of theirs, but it is nowhere in the near future. This means that there is no special account to house the money for the down payment and there is probably no specific monetary goal formed. This person will eventually buy a house, but probably years or decades later than the other two alternatives.

How to Save A Down Payment

As you can tell from the different tracks to saving up a down payment, there are lots of different approaches to saving a down payment. But, that doesn't mean that there aren't universal tips for those who are starting to save up a down payment.

• Keep the Majority of the Down Payment Liquid - While it may delay your savings, if you hoping to buy a home anytime soon, don't invest too much money in risky investments. Being too greedy when you need the money is never a good investment strategy. If you choose to invest some of the money that you plan to utilize as a down payment, keep it to a minimum. I plan on investing some money because I don't want to give up investing for my future while we save for our future home. But, I am not counting on that money for the home. If everything goes to plan, I will be able to save up enough to cover the upfront costs AND have money invested for the long-term.
• Use High Interest Bank Account - Another great option to consider is to use a high-interest savings account. My main account at Chase doesn't offer the best interest, so I am also using a high-interest savings account that gives me nearly 1%. This means the difference of hundreds of dollars over a couple of years. While it's not a huge difference, every bit helps.
• Automate it - A great way to stay on track is to force yourself to save money each and every month. Setting up an an automatic deposit into your high interest savings account is a great way to save up the down payment. Tell yourself that it is already saved and keep yourself on track.

I have already started researching and have a small amount already designated for the upfront costs of buying a home. I estimate that it will take us 2-3 years to save up enough money while also still investing for retirement. Any extra money from potential promotions or raises will be put towards this goal. I am really excited to be able to buy our first home and I am going to do everything I can to make sure that we are adequately prepared.

Readers, if you have already bought a home, how did you save up to cover the upfront costs of buying your first home? How long did it take you?