I'm looking to buy my first home in about 1-2 years and I would like to start putting money away for a down payment. What are the best investment options for first time home buyers that will give me the best return for my money in that short amount of time?
Congratulations on your upcoming purchase of a home. I remember when my wife and I bought our first home and how exciting it was. Even though I no longer own it, that home still holds a special place in my heart. Let me also commend you on saving for the down payment. I want to answer your question and then provide a few additional thoughts to consider.
1) For your 1-2 year timeframe, you want to stay away from any market risk that comes with investments. When it comes to investing, you ideally want to have at least a 5+ year time horizon so you can weather a complete market cycle. Investments are not guaranteed and are not appropriate for short term goals like yours. If you invest in the market, you could find yourself with less than you have put in which could negatively affect your ability to buy a home. The best place to stash this money is in a guaranteed place like a USAA FDIC insured savings account. Create a separate account on usaa.com or the mobile device and label it "House Down Payment" to keep it separate from other savings account you may have like your emergency fund.
2) If you are putting less than 20% down payment, most types of loans will require you to pay MI (Mortgage Insurance) which is a policy that protects the mortgage lender from losing money if you fail to pay and end up in foreclosure. However, if you have access to a VA loan, you can have less than a 20% down payment and not pay PMI as the loan is backed by the VA, which is a wonderful benefit.
3) While you are now looking to start this down payment, it is a wonderful time to review you cash flow and determine how much you should realistically spend on this home each month. Don't forget to include maintenance, utilities, taxes, and insurance. I use the word "should" because I often see people sacrifice other goals such as saving for retirement, increasing emergency fund, or saving for children's college in order to purchase a bigger home. Sit down and prioritize all your financial goals and come up with a cash flow plan to accomplish them. For example, building and maintaining an emergency fund should rank higher than a home down payment fund. This enables you to purchase a home that is affordable and will not put your other financial goals as risk.
I wish you the best of luck in this first home purchase. I also welcome any questions anyone might have on this topic.