Buying your first home is a dream come true for many. In fact, over 60% of the US population are homeowners. Even though the cost can be anywhere between 2 to 9 times your annual income, you can be one of them too.
Of course, a key component is having enough cash on hand for a down payment.
First time home buyers often struggle with the question: “Should I ask mom or dad for some help?”
But before you do, keep in mind that borrowing from your parents can put a strain on your relationship, not to mention their finances. Plus, relying on the Bank of Mom & Dad prevents you from being fully independent and getting treated like an adult.
So what other options are there? Actually, there’s plenty.
In fact, here are nine tactics you can use to buy your first home without borrowing from your parents.
1 - Start Saving Yesterday
According to the US Census 2010, the average home price was $272,000; however, this didn't account for the hefty costs in cities like San Francisco or New York where the average price can be three times that amount.
No matter how you look at it, this means that you’re going to have to save up a decent pile of cash in order to get started.
The sooner you start saving, the easier it's going to be. Ideally, your savings habit would have started from your first job, even if that job was when you were fifteen and your wages were modest.
In reality, almost half of Americans would not be able to cover an unexpected expense of $500 or less, which goes to show just how little the average person is saving.
Here’s the good news. Even if you don’t have anything saved up yet doesn’t mean you can’t get started. Yesterday might have been the best time to start saving, but today is the second best time.
Even starting with a $1 a day can bring you a step closer to owning your first home.
Sounds crazy right? But that’s not a joke or exaggeration.
Successful saving is about the habit more than it is the amount. You can start small, and build up your savings at your own pace.
For example: Start with 1% of your paycheck and increase it each month. By the end of the year, you'll be saving 12% and have developed a habit for life. Keep the pace and by year two you'll be saving at a rate of 24%, which can significantly increase your ability to make a down payment.
2 - Have a Plan
Buying a home is the most expensive purchase most people will ever make, and it's not a decision to be taken lightly.
Although CBS News reported cities like Detroit and Cleveland have homes from as little as $50,000, you'll probably be paying much more for yours.
Considering that you'll likely be paying anywhere from $150,000 to $500,000 or more.
So considering the fact that this is one of the biggest financial decisions a person ever makes, it’s not something you just wake up one morning and do. It requires preparation.
Planning is key to getting the best house you can for the money (or availability to borrow) that you have.
- How much can I afford to save (without living off ramen & boiled potatoes)?
- How much deposit do I need? 10%, 20%, 50%?
- When am I planning to buy?
- Where do I want to live?
- Do I want a 15 or 30-year mortgage?
If you follow Dave Ramsey's advice, you'll be better off aiming for a 15-year mortgage unless you want to spend the majority of your life (and money) paying off a home.
Give yourself a reasonable amount of time to save, but not so long that you forget about your goal. One to two years is a good start. You can always adjust if you feel you need to save more or haven't found the right property.
3 - Reduce Your Expenses... Now!
When you're saving for a house, you'll want to reduce your costs as much as possible. Swap the takeout for a home-cooked meal or watching a DVD instead of going to the movies. But balance is key here - you don't need to be too stingy, or you’ll quit.
The key is that when you’re going to spend, that you spend intentionally. Give yourself a weekly or monthly “sanity allowance”. Then use it guilt free on whatever you want. The rest of the time, stick to your plan.
The sanity allowance shouldn't be more than 10% of your paycheck (or 5% when saving for a house).
Get rid of cable, take-out (learn to cook!), alcohol, cigarettes, Lottery tickets. Take the money you would have spent and throw it straight into your savings. These expenses can add up to thousands of dollars by the end of the year.
Another way to cut costs (warning: this isn't for everyone)? Live at home longer. Your parents might charge you a nominal rent compared to market prices, which can give you an advantage when trying to cut your expenses. Plus you might get lucky and get a decent meal thrown in.
4 - Get a Side Hustle
Having a second job that brings in extra bacon is quickly becoming the norm.
Whether it's waiting tables, freelance writing, weekend wedding photography, babysitting or driving an Uber. Do you want that house? Take the time to hustle and save every penny you get. If you earn an extra $100 per week, you'll have $5,200 at the end of the year, which equals 5% deposit towards a $100,000 house.
The ability to have a side job will depend on your situation. Remember: Make time for your family and friends, even if it means working less.
The choice of side hustle is important, so is maximizing your time. Find something that works for you.
5 - Eliminate Debt
Debt is like a noose around your neck. When you buy your first home, you don't want too much debt on your shoulders. Pay off your personal debts as quickly as possible and don't take on any more. The only thing you want to be paying off is your first home.
According to The Fool, doubling your repayments will reduce your debt levels quicker than regular payments - and you'll feel better too!
One way to do this is to create a plan for debt elimination as you would for saving.
Pay off your lowest debt first, then take that amount and add it to your next lowest debt. It'll increase your repayment and give you the snowball effect. You'll eliminate your debt much faster.
6 - Sell Your Junk
Clutter is painful and not healthy for your mental state or your finances. The time, energy, and money it takes to store and care for things we rarely use makes us less able to afford the things that truly matter.
You might even find with less stuff you'll need a smaller home!
Take your stuff and create four piles - keep, sell, donate, trash and have a yard sale. Put your items on Craigslist or eBay (it's amazing what other people are willing to buy) and stash the money away in savings.
7 - Overestimate How Much You Need
Overestimating your expenses creates a buffer that you may or may not use for the unexpected expenses that crop up.
Ideally, you won't be spending more than three times your annual income to purchase a home, although in parts of the country that’s impossible. Knowing this, you should aim to save a higher deposit so your mortgage loan is lower and more affordable.
For example, The house you want to buy is $250,000. You would like to buy in three years with a 30% deposit. Aim to save 10% of the cost each year - or $25,000.
Impossible? No, it's doable with a bit sacrifice, hard work, side hustling and being frugal.
And if it’s not doable, you probably need to rethink your goal. Perhaps a smaller house, a different area, or saving up for longer before buying.
Not sure if you can afford a mortgage? Then as you’re renting, save the difference between how much rent you pay and your future mortgage payment. This will build up your savings and let you test in a low-risk environment if such mortgage payments would be comfortable for you.
8 - Take Your Time
You don't need to buy the house right away. Save more and you'll be in a better position later on. If it takes you five years, you'll still get your house but with less financial stress.
Here’s one big advantage of patience you may not have considered: Saving shows your future lender your ability to repay the loan even if yourcredit history is not up to par.
This makes it far more likely you’ll get your mortgage approved - and give you more leverage when negotiating rates.
One great way to do this is to save what you would be spending on your future mortgage payments, then add an additional ten percent.
You'll prove that you are more than capable of repaying the loan.
[Bonus] Get Ahead Of Your Payments
Once you're a homeowner (and didn't have to stress out your parents with the extra financial pressure), why not try and get ahead of your payments?
Take a look at this example:
A $200,000 loan at 3% interest over 15 years will have an approximate monthly payment of $1,380.
Increasing the minimum payment by $300 reduces your loan term by 3.3 years and saves you almost $11,000 in interest. Not bad!
Making extra payments on your first home is vital. Even if you have a 15-year-mortgage, you want to pay it off as quickly as possible. Just make sure there are no fees and charges for extra repayments.
Owning a home is a dream come true for many.
Buying your first home without borrowing from the parents can be done with a bit of hustling, eliminating the unnecessary, and taking the time to save enough for a decent deposit.
Plus, you'll feel more confident about your ability to afford your home without the strings attached when borrowing from family.
Now it’s your turn. Any other strategies you’ve used to save for a home?