[Chelsea Damon]

I would like to know tips on saving up for a down payment, building credit, and any other information that might be helpful for preparing to buy a home in the future.

[Sum180 Lead Coach]

Hi, Chelsea — I’m sure others will have great practical tips for you but I’m going to give you an answer from the perspective of how SUM180 looks at this. First, determine “how much house” you should buy. Generally you can afford a home that has a market value of two or 2 1/2 times your income. If your income is not super steady, you may want to go lower than that. Second, save a 20% down payment on that amount. So if the market value was $110,000, work to save $22,000, plus 3-4% ($3-4,000) for any extra mortgage-related or other costs. This will give you a cushion. Finally, get your FICO score and be sure it is up in the high 700s or higher, to give you the best chance at a lower cost mortgage.

[Lisa Talley]

Hi, I have a related question about home buying but from a different perspective.

But first, for Chelsea – I have a suggestion for building a down payment. What works for me is to have a specific amount automatically transferred into a special savings account every month. As soon as my direct deposit hits, the money is transferred, so I never miss it. I also got rid of cable TV (which I realized I never use) and added that amount to what I save monthly.

My question for everyone is about how to determine “how much house I can afford” – since I am a newly self-employed person. I don’t have a lot of business expenses – mainly home office related. Do I simply use the 2x formula after I deduct home office expenses from my gross income?

[Lisa Talley]

One more suggestion for building a down payment. I haven’t done this myself but it was suggested to me by a friend – it worked for her. Move into the most affordable rental you can stand. Sock away every cent you would otherwise be spending to rent a nicer/bigger place. A few short years later, you’ll have a sizeable down payment saved up.

If a family member is willing to let you live in their basement rent free – perhaps consider this, too. It’s a sacrifice in the short term but the long term payoff is huge!

[Sum180 Lead Coach]

Great ideas, Lisa. Getting your money out of your immediate reach is something we could all do more of. On your question of “how much house?” you can afford, your 2X number is nice and conservative. Depending on your other assets, conventional wisdom has been that it could be higher than that, like 2.5X but not more than 4X your income.