The 100% Down Plan

Mark asks if someone is on Baby Step 3(b) and wants to pay 100% down on the house, what should the cash goal be for a starter home?

QUESTION: Mark on Twitter asks if someone is on Baby Step 3(b) and wants to pay 100% down on the house, what should the cash goal be for a starter home? Dave advises working out how much Mark makes a year and how much he can save in a year if he goes crazy with saving.

ANSWER: Let’s talk through what he’s talking about first. Baby Step 1 is $1,000 in the bank, Baby Step 2 is debt-free but the house, and Baby Step 3 is a fully funded emergency fund. At that point, if you want to buy a home and don’t have a home, that’s when you start saving for your down payment. We call that Baby Step 3(b).

I think what you’ve got to look at is how quickly you can pay cash for a home given your income. I don't think there’s a set dollar amount or ratio, but you just start thinking about it. What do you make a year? And if you don’t have any payments, and you’re renting, how fast can you save if you go crazy saving? If you make $100,000 a year and want to save $30,000 a year and want to buy a $90,000 house, it would take you three years. A $120,000 house would take four years. That would be your starter house. Nationally, there are homes that can be purchased in reasonable neighborhoods in most communities for $100,000 to $150,000. They’re not big houses. They’re not fancy houses. It’s a starter home. Translation: We’re not going to live there our whole lives. We’re going to use the fact that we’re 27 years old with no house payment, no car payments, no student loans, and we’re going to pile up cash and move up and out of the starter home with cash—soon. By the time you’re 35 or 40, you’re living in a very nice paid-for home and have never had a house payment in your life. How weird is that? That’s a real possibility in some communities with some incomes. But if you make $16,000 a year, this is going to be very hard. It’s going to take a long time. But when you make $16,000 a year, you don’t need to go buy a $150,000 or $250,000 house. You can’t afford the payments even though some idiot in the mortgage industry will probably loan you the money.

What you’ve got to do is look at the ratio of your income toward how much you can save, and come up with a number of years you’re willing to wait.

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