Six smart ways to save for a starter home

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By Erik J. Martin
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Many people dream of stepping up to home ownership. They’d love to purchase a starter house but worry about breaking the bank. It’s a valid concern, considering the cost of housing, the difficulty of salting away a down payment and then meeting a monthly mortgage.

Adopting a few money-saving strategies and sticking with them over time can help turn the dream into a reality quicker.

Almost one in five prospective buyers polled are actively looking to buy their first home, with 62 percent (67 percent among millennials) looking to purchase in the next two years, according to TD Bank’s First-Time Home Buyer Pulse survey published last July. Yet, 64 percent and 45 percent of respondents, respectively, listed “needing to save money for a down payment” and “needing to pay down debt” as major barriers.

“A majority of first-time buyers we see entering the market today are millennials, who are beginning to settle down, get married and start families,” says Ray Rodriguez, regional sales manager for TD Bank in New York and New Jersey. “They’re more motivated now because interest rates remain near historic lows and many lenders are offering home affordability and down payment assistance programs.”

In addition, many markets offer an increased inventory of available homes, “so there’s a better selection from a buyer’s perspective,” says Marty Green, a real estate attorney with Polunsky Beitel Green, Dallas. “Also, rents have increased in some parts of the country so that it now costs more to rent than to buy in many markets.”

But while would-be buyers may be more motivated, the problem remains: how can they best save for and own a starter home faster?

Here are six smart moves:

  1. Put savings on auto-pilot

Set up a weekly automatic withdrawal from your checking account into the highest-yield savings account you can find. “Set a goal and timeline to ensure that you’re investing the appropriate amount,” says Rodriguez.

  1. Trim living expenses

Learn to live on less while you save. “Put some things, like that grand vacation, on the back burner,” says Chantay Bridges, TruLine Realty, Beverly Hills. “Make and keep a budget.”

  1. Reduce housing costs

Figure out a way to reduce your rental expense with some roommates. Or, consider moving back in with your parents, “saving hundreds or thousands a month that would otherwise go toward rent,” says Brian Koss, Mortgage Network, Danvers, Massachusetts.

  1. Get the low-down on low down payments

Investigate low down payment programs, including:

  • Fannie Mae’s HomeReady mortgage
  • Freddie Mac’s Home Possible mortgage
  • FHA’s first-time buyer 3.5 percent down loan
  • no down payment loans from the Department of Veterans Affairs and from USDA
  • down payment assistance programs offering by many cities, counties and states

“People are often surprised that they may qualify for these programs,” says Green, who advises talking with a mortgage professional about these options.

  1. Piggyback down payments

Finance 90 percent of the purchase price and take out two mortgages, TD Bank’s Rodriquez suggests. “The first can be set for 80 percent of the home price. The second, in the form of a home equity line of credit, can be set for 10 percent. This way, you’re only required to put down 10 percent of the home price and you avoid having to pay for private mortgage insurance.”

  1. Consider buy-to-rent

If you have the time, interest and discipline, you might consider purchasing a starter home and turning it into a leased property or vacation rental. This ambitious step should not be taken lightly — but it is one method to help save up for a bigger/better home later. “It’s important to consider if you can handle being a landlord and the added responsibilities,” says Rodriguez.

Finally, be aware that home ownership involves expenses beyond a down payment and monthly mortgage amount, including taxes, insurance, repair and furnishings. “Buyers really need to understand these costs before submitting an offer,” Green says.

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