Tired of having to pay rent and move around? Maybe it’s time to finally settle down and buy the house of your dreams! Even if you don’t plan on buying for a few years yet, it’s important to start saving for a house now to better your position in the long run. After all, buying a house is “the American dream” and considered a HUGE milestone in adulthood.
The problem is that there are a lot of financial obstacles in the way, such as debts accrued via credit cards, student loans, car loans, and even medical expenses. So…is it even possible?
Yes! It is!
We’ve compiled here a list of six steps to help save for a house. Unlike other savings funds, such as retirement funds, you’ll have to pay large sums of money both upfront and over an extended period of time to buy a home.
One of the most daunting costs is the down payment. This payment acts as an initial show of good faith that you’ll be able to pay the full amount – similar to security deposits for rental properties. Depending on how large of a down payment you can afford, you may be able to pay less in monthly house payments and forge better relations with your bank.
You may even qualify for a shorter mortgage term, meaning paying the debt off sooner rather than later!
So what are we waiting for? Let’s get started!
Step 1: Decide On Your Budget And Time Frame
Before you can even start the house buying process, you have to assess your current budget. Ask yourself “How much can I comfortably afford on a house?” It would be unwise to spend all your money on a house in one go – especially when there are other house costs.
Not only do you have to worry about the purchase price of the home, but you also have to consider expenses such as property taxes, home insurance, closing costs, and house maintenance costs. While some costs are out of your control, we suggest creating a budget with some leeway for unexpected future costs. It may even help to create a separate emergency savings fund.
After figuring out how much you can afford on a house, calculate how much you need to save for a down payment. Financial experts tend to recommend a 20% down payment to avoid paying private mortgage insurance (PMI), but you can still buy a house with a lower down payment. Not to mention that there are plenty of mortgage loans and ways to buy a house with no money down!
Even the living costs in your area and credit score can impact how much money you need. Knowing how long down the road you are looking to buy a house will also help with the down payment. The longer it takes, the more money you can save for a house without having to increase your annual savings.
Talking to a mortgage lender or financial adviser can help you plan your budget and save for a house comfortably. As a general rule, you should allocate no more than 28% of your monthly income to housing expense.
Take $4000 as the monthly income as our example. 28% of $4000 equals $1120 per month. This amount should not only go toward your mortgage principal and interest, but other house-related expenses such as real estate taxes, PMI, and maintenance.
Say the sticker price of your dream home is about $200,000. While the down payment does not have to be 20%, it is certainly ideal to save as much money as possible for the down payment to get the best possible deal.
The calculation for how much you would need is as follows:
$200,000 / 0.20 = $40,000
This means that for a $200,000 house, you would need to plan for a down payment of $40,000. Of course, the numbers will vary depending on your situation and the mortgage loan rates at the time of purchase. This quick calculation just serves to provide an estimate to how much you should start saving.
Step 2: Pay Off Your Debts
Almost everyone has accrued debt at some point in our lives! While it’s completely understandable if you have debts, it’s important to try to pay off as much debt as early as you can. The more you can pay off now, the less financial pressure you feel when saving for a house. Not to mention, you can get a much better house mortgage rate if your debts are paid.
Debts include car loans, student loans, credit cards, or other types of loans. Lenders will look at your debt-to-income (DTI) ratio and your credit score to determine what mortgage rates and programs you qualify for. Usually, they prefer a maximum ratio of 28%, but the Federal Housing Administration (FHA) only requires a 43% DTI for their mortgage program.
Some general tips that might help with cutting down debt is to analyze what types of debts you have. If you have student loans with high interest rates, refinancing them may help lower payments. The same applies if you have credit card debt with high interest – try to pay off as much as you can and possibly transfer your balance to a lower interest card.
Step 3: Cut Expenses In Your Budget
So far we’ve covered what you can do to prepare for saving for a house. Now it’s time to think about where that money is going to come from!
The simplest (and arguably easiest) way to save, is to start budgeting! This starts with you analyzing your current costs to see if there is anything you can save on.
To help you get started, we’ve put together a few ideas:
- Cut that cable package
- Cancel gym memberships
- Eat out less frequently
- Buy generic brands
- Reduce utility usage
- Use public or shared transportation
Once you start cutting back on expenses, you’ll find that you have more money than you think! Budgeting significantly helps when saving for a house, not to mention other expenses you may have. Even reducing your current total expenses by about 10% can free up thousands of dollars toward a down payment in a few short years.
For more in-depth tips on planning your finances, check out our article on how to budget by hand.
Step 4: Pick Up A Side Hustle
Saving on expenses is one thing, but what if it’s still not enough? After all, buying a house can be fairly expensive!
One way to alleviate the burden may be to pick up another job to boost your income. Think of whatever hobbies you really enjoy and consider ways you could monetize it. This could include pet-sitting for friends and family, landscaping, ride-sharing, or even selling your services as a private tutor! There are endless possibilities to a good “side hustle” as long as you put your mind to it!
You shouldn’t overwork yourself, though. Working even a few hours per week eventually adds up and can really help in saving for a down payment.
For instance, say that you work only 15 hours a week making $10 per hour. After taxes, that would amount to about $110 per week, or $440 per month. In 2 years, you would already have about $10,560 saved up for a house just from side gigs! This amount – especially in addition to your main income – should significantly help with the house buying process.
Step 5: Pay For Your “Future Mortgage”
Long before looking at a house, you should start saving money for your future house payments. You can even think of it as paying for your “future mortgage” while currently storing it as a savings fund.
One common way to do this is to put the difference between your current rent and estimated mortgage payment into your savings account. Try your best to treat it as an actual monthly expense to ensure routine payments to your house fund. It tends to help that it’s smaller deposits over time rather than a large deposit all at once. This way, by the time you are ready to put a house down payment, you won’t have to stress about where to scrounge up the money.
If managing money is a little more difficult for you, you may want to look into automated savings. Instead of manually transferring money to your savings every month, contact your bank to authorize an automatic withdrawal into the savings account. This significantly helps make the money less accessible for that impulse bikini shopping! Just make sure there’s enough money so you don’t go into overdraft and actually harm your bank account.
Furthermore, if you’re lucky enough to get any large sums of money such as a work bonus or income-tax refunds, deposit that into the savings account, too! It “fast-tracks” the amount of time it takes to save enough money for a house. The less you give into money splurging, the less time you have to wait for your house!
Step 6: Ask For Help From Friends/Family
Last (but not least!), never be afraid to ask for help! Down payments are one of the largest sums of money any individual or couple will pay upfront, and it’s okay to ask your friends and family if they can gift money for holidays and events to help. Let them know that you aren’t in as big of a need for physical gifts and rather need help with saving for a house. In this age, more and more people are even crowd sourcing their down payments through websites and apps.
Granted, some people may not be able to financially support you through gift money, but they may be able to point you into the right direction to supplemental income. This could be in the form of a job referral, budgeting advice or even advice in bond investments. There are so many options available out there – so why not ask for help saving for your dream house?
When Should I Buy A Home?
Timing is everything – both for your timeline and the state of the economy and housing market. Assuming that you have enough house savings, the next thing to consider is the status of the housing market. Buying a house is an expensive investment and while real estate was considered a safe investment in the past, events like the COVID-19 pandemic raise a few homeowner concerns. It’s important to look at the housing market and understand factors that go into your decision to buy.
Interest rates for example, tend to vary per year and depend upon housing economics. The lower the interest rate, the less money you have to pay on the monthly mortgage payments. If interest rates are dropping, you should wait a little longer to get the lowest interest rate possible. On the other hand, if interest rates are rising and you have enough house savings, you should plan on buying sooner rather than later. That way, you may have leftover savings for other expenses!
A Final Word
When it comes to buying a house, the more affordable, the better. But it’s also important to keep your savings plan flexible. You have to account for all the other possible costs associated with buying a house like the PMI, appraisal and inspection fees, mortgage payments, and closing costs into your house savings fund – all queries you should make when buying a house.
But once you follow these six steps, you’ll be in a much better place to buy a home. Not only will you be debt-free (or less in debt), but you also will also have enough room in your budget for future emergencies and funds. This includes retirement funds, children’s college funds, and overall personal wealth.
Think of the steps you’re taking now to save for a house as a trial run for when you become a homeowner. And remember, the house buying process is a marathon, not a sprint! By saving now, you’re just one step closer to owning your dream home one day!