Budgeting to buy a home in San Diego can feel like a monumental undertaking. It doesn’t help that home prices keep going up – in May, the San Diego Union-Tribune reported that the median home price in San Diego County is now $570,000! Still, home ownership is one of the best ways you can build wealth for yourself and your family. It just may take you longer to afford a home in San Diego than in another part of the country. But if you’re committed to being here for the long haul, you should start budgeting to buy a home if you haven’t already.
Step #1: Raise Your Credit
If it’s been awhile since you’ve checked your credit, take a look at your score and start working on making improvements where you need them. You can refer back to this post where I answered a few common questions people typically have about their credit score for ideas on what to do to improve your score. Your credit score is a crucial part of the home buying process because it helps determine what rate you get for your mortgage and can even qualify you for special loan programs.
Step #2: Determine How Much You Need to Save
Next, you’ll need to determine how much you need to save for a down payment. You don’t need to put 20% down! There are many loan programs you can qualify for that require just 3-5% down. You can use the median home price for San Diego County as a baseline or if you already know what you want to buy, check current home prices in that neighborhood. Keep in mind that if you put less than 20% down on a home, you’ll need to pay Private Mortgage Insurance (PMI) which is an extra cost on top of your mortgage. However, you may be able to refinance out of it once you’ve built up enough equity.
Step #3: Decide on a Time Frame
Once you’ve figured out how much you need to save, you need to decide when you’d like to buy a home. In five years? Or two? Divide the amount you need to save for your down payment by your ideal timeframe to figure out how much you need to contribute annually to your house fund. From there, you can figure out your monthly savings goal.
Step #4: Create a Budget
Saving for a home requires setting (and keeping) a budget. You’ll likely need to make changes to your spending habits in order to successfully save for a home and that starts with taking a hard look at where your money is going. While you’re reviewing your finances, you’ll also want to consider your Debt-to-Income ratio (DTI). Most lenders require your DTI to be below 40%. Special circumstances apply, but in general you should be working to bring your DTI to below 40%. That might mean paying off more of your student loans or reducing your car payment. And while you’re creating your new budget, don’t forget to budget for your emergency fund. You’ll need to show the lender you have additional cash reserves besides your down payment for closing costs and the inevitable repairs your home will need.
Step #5: Set Up a Special, Automated Savings Account
Go to the bank and set up a special savings account for your down payment. Then, set up automated transfers from the account you currently deposit your earnings into. Making this an automated process ensures that you won’t “accidentally” spend your house savings on a new computer or a vacation. Treat this savings account as if it is completely off-limits and do not dip into it except in dire circumstances. Emergencies happen, but you need to be honest with yourself about what constitutes an actual emergency.
Step #6: Contribute the Extras
Did you get a tax return this year? A bonus? Put these unexpected windfalls into your home savings account. You weren’t expecting those funds anyway so you won’t miss it.
You should also work to actively raise your income at your current workplace or pick up a side hustle like driving for Uber or selling thrift store finds on Ebay. Use any extra cash you earn from your side hustle as additional fodder for your down payment fund.
Step #7: Be Flexible
Life happens. Be kind to yourself if things don’t go according to plan. Just do your best and be as consistent as you can.
If you’re feeling like you might be ready to buy, check out my Total Beginner’s Guide to Buying a Home. Then, give me a call – I’d love to help you become a San Diego homeowner!