Are you interested in being a first time home buyer? A first priority will be learning to save, both for buying the home, and then for keeping it in good shape. There’s more to it, but that is usually the hardest part.

credit cardsWhere do you begin?

  • Having a budget will enable you to figure out where you can save more and spend less
  • Clean up any errors on your credit
  • Create a home buying plan

Save with a Budget

Creating a budget can be tedious, and admittedly it’s not fun, but it is immensely helpful if you want to get control over your finances (rather than have your spending control you). There are many free, online programs from financial gurus who can help you sort out what you need to factor in and where you may be able to cut costs, save for that house or condo (or retirement), and what is essential versus discretionary. Investopedia has a list of good sources. (I’ve used the Every Dollar one, it’s easy!)

Something to keep in mind is that having a budget and a plan to save is not something temporary, like a diet before a vacation that will be abandoned in the near future. Budgeting so that there’s money set aside for the most important things you want is a way of life. We intuitively know that if we spend all of our hard earned income on meals out, expensive cars, and luxury vacations, we may not be able to retire as early or as comfortably as we’d like. But unless we create the financial life we truly desire, it won’t happen. That’s as true for buying a home as it is for the retirement scenario.

Along these lines, I want to add that I’ve often heard people misuse the word “investment”. One person I know referred to the purchase of an expensive hair styling tool as an investment. She was thinking “it’s a really good one – it’s costly, but it will last”. That’s not an investment, it’s an expenditure, and apparently an expensive one. An investment is something that will make you money, like shared in a strongly performing stock that pays dividends. You can argue that a college degree will enable you to get a better paying job, and you are investing in your future by getting one (as long as you don’t end up with student loans you can never pay off).

We don’t invest in cashmere sweaters, in Peloton bikes, designer purses, or brand new and expensive cars. Autos are the best example – they depreciate the moment you roll them off the lot. If you want to save for the future you really want, don’t fool yourself by calling expensive purchases that you want investments. That mindset will get you into trouble as you will have more and more luxury items, clothes, or gadgets, but you won’t end up with the big prizes you deeply desire, like a comfortable retirement or the home you would be able to afford had you saved that cash – and not squandered it.

My grandfather used to admonish me with “save your dough!” It was great advice then and now. A budget will help you to save more effectively.

How’s your credit score?

The next important step, while you are creating and implementing your budget, is to get a look at your credit score.

Do you know what your credit scores are? If not, there are many online sites where you can run this info at no cost or very low cost. Here’s one:  There are three credit scoring bodies: Equifax, TransUnion and Experian.  Some of the “free” sites aren’t really free – so check the small print.

Often there are small errors on your credit report (such as an old bill which you did eventually pay but is showing as due or delinquent), but you can write to the agency with whatever is amiss and provide documentation to clear it up.  This can take time, though, so you want to start this process when you are not in a hurry.

If your credit is not stellar, do some research before deciding how to fix it. Some people mistakenly think that they should close all of their credit cards, and in fact this might not help, but rather hurt, your credit.  Inactivity on some of your cards may also be counterproductive to your scores. And, of course, if you are over your limits, you definitely want to pay those bills down both to get that monkey off your back and to improve your credit scores – and to help with savings! One of the most important things you can do is to make your payments on time or even a little early. You need to be a reliable credit risk by your dependable payments.

House of CardsGot credit card debt? There are programs online to help you figure out how to attack it and get ahead of it. Dave Ramsey has his 7 “baby steps” to help people organize and prioritize their spending. His approach to paying off debts involves paying the smallest loan off first (rather than the highest interest rate one) so that you get the accomplishment of wiping that burden out and then are more motivated to keep going. (Their philosophy includes not worrying about credit scores and getting rid of credit cards all together, so it may not be for everyone, but I personally found his debt snowball strategy to be quite helpful.)

One last note: please don’t get your credit run frequently. That will not help. Too many credit inquiries will cause your score to decline. Find out what it is, set about to improve it, and don’t run it again for a year. (I am not a loan expert, so suggest you do a little research on this topic, as this kind of thing may be subject to change over time.)

Down payment

While the media is full of hype about first time home buyers purchasing with FHA loans and very small down payments (5%), in actuality it is extremely difficult to purchase a home in Santa Clara County with such a tiny percentage of cash, especially now.  Most sellers and their real estate agents view “small downs” as risky – that is, that there’s a higher probability that these transactions won’t close.  Most of the time, if you have a small down payment and are bidding in a multiple offer situation, you will lose.

Ideally, you will have saved 20% down plus closing costs (about 2%) plusreservesplus needed repairs – so perhaps 23-25% is what you actually need in the bank to get your offer accepted (and you may be beat out by others with 30% down or more).  Yes, that IS a lot of money, but if you want to buy a home in this hyper competitive market, that’s a good target.  Twenty percent down is a normal loan.  A next best option is 10-15% down with a conventional loan.

If you are buying a modest 2 – 3 bedroom house or condo or townhouse in Silicon Valley, that means you’ll be spending at least $1 million (90% of the time) and most likely you’ll want to target about $225,000 minimum for that down payment.  (Need more than a modest home? You may need closer to $500,000 to get in the door, depending…. An average house in Santa Clara County today is selling at $2,026,750 -prices for May 2021.) For the City of San Jose, it’s a little better: the average price for a single family home is $1,586,400. In San Mateo County, it’s over $2.6 mil. )

Home buying plan

Now that you have a budget and savings plan (and maybe a debt reduction plan), it’s time to figure out what you can afford and when you think you’ll have enough saved to be able to afford it. For some, this is the hardest part. It’s hard because you must try to assess where prices will be in the future (both for the real estate and for the loan) and because expectations may not line up with the reality of what the market will deliver. The challenges are both practical and emotional.

Practical issue: Over the last year, Silicon Valley home prices have skyrocketed and generally are about 20% more than a year ago. Interest rates are still holding steady at around 3%, though. I don’t have a great way to assess where prices will be in the future. Downturns happen. But prices have about doubled in the last 10-12 years, and about tripled in the last 25 years, despite several downturns. My general sense is that if it takes you 3 years to save, you may roughly estimate that prices could be up 8 – 10% per year (maybe some years prices will decline, and other years prices up double digits.) Interest rates? I honestly don’t know. Some lenders believe that interest rates must stay low because of the federal government’s debt. Others say it will have to rise for other reasons.

A question to consider is this: are prices rising faster than you can save? At many points in our Santa Clara Valley history, that is the case. If so, have a conversation with a trusted Realtor or lender and see what they would suggest in your situation.   (In every market, there are some homes that don’t sell fast, and it may be possible to buy with a smaller down payment if you are willing to put the sweat equity in later.

Many first time home buyers are assisted by family members who either gift part of the down payment or who lend it to the buyer(s). If you are in a position where this is possible, that’s a big help, particularly when prices rise so fast that you really cannot save at the same rate.

Emotional issue: As a renter, your leased or rented home may be quite a bit nicer than the house or townhouse you can afford to purchase. It can be a step down, in other words.

This is where you want to check your motivation to buy. When potential home buyers tell me that they don’t want to buy what they can afford because they don’t like what they can afford, they have a choice: they can keep renting and not buy, they can continue saving, they can buy something modest that they don’t love but fix it over time, or they can buy something they do like but which has a very long commute.

If there’s a compelling reason to buy – say you want to set down roots in a particular school district, or within a set amount of commute time to work and rent rooms out so you can pay the home off sooner to build wealth – it will be easier. Having clear priorities, especially if they are ranked priorities, will help get over the emotional issue of buying a home that isn’t as nice looking as what you can afford to rent.

Saving as a way of life

All that budgeting and saving – if you can only get into the new home, then you can “relax” and go back to spending, right?  No, not right. Real estate takes money to maintain, and even if you’re in a condominium or town house  area, you need to have cash available in case something breaks or in case your dues are raised or there’s a special assessment by your HOA.  To be a homeowner who’s not going to get into financial trouble, you really need to have your own reserve account and new habits that you’ll keep.

As a homeowner, it’s wise to put aside 1% of the home’s value per year for repairs and renovation. Even if the house looks fantastic now, at some point it will need a new roof, paint, possibly upgrades to electrical or plumbing, replacing the driveway or the waste lines, or any number of things. When your kitchen or bathroom is 20+ years old, you may want to renovate it. Surprises can happen with an appliance dies, the refrigerator water line floods the house, an earthquake strikes, or you get raccoons invading your attic. On a million dollar home, that is $10,000 per year, on a two million dollar home, plan on $20,000 per year.

Many Americans tend to live off of 105% ore more of their annual income – they cut it too close and then when they hit a problem (for which they did not reserve any money), they go into the red.  Credit card bills begin to mount.  They take out a line of credit on their home and use it all up.

But that doesn’t have to be your story.  You can plan to live on less and sock away the rest for a rainy day, for retirement, for future plans, whether someone’s college education, purchasing income producing property or world travels.

All of this is to say: if you are struggling to save the down payment, perhaps the first thing to do is to focus on cutting debt and unnecessary expenditures with a budget plan, saving money and living on less. It’s a mental shift. Make this a way of life. First you will accomplish your goal of having the down payment, but if you can save that habit, you will be building for a more solid future for yourself and those in your household.


  • Mary Pope-Handy

    Silicon Valley Realtor, selling homes in Los Gatos, Saratoga, San Jose, Silicon Valley, and nearby since 1993. Prolific blogger with a network of sites.

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