It's one of the largest purchases you'll ever make, but owning a home can also be a great investment. It's the American dream. You share that dream, but maybe you're not sure how to save money for a house. You want to own a place where you can hang your hat (and pictures and shelving units.) You want to paint the walls, have 10 cats, three dogs, and some backyard chickens.
Then the cold hard reality of needing cold hard cash sets in. Conventional mortgages require at least 20% down. There are also closing costs, property taxes, home insurance, and a house maintenance fund to fund. Saving that kind of dough could take years, or decades, depending on the housing prices and the money you're making. Before you decide to be a renter forever, though, know that there are ways to save for your American dream, even if you are on a budget.
Understanding the Down Payment
Before we get into the how to save money for a house, it's important to look at what you are saving money for. Most of the expense of buying a home is the down payment. The down payment is the money you need to secure a mortgage. The more money you put down on the home, the more favorable you look to a lender. There are a few ways to lower the percentage rate, but a conventional mortgage requires that you put down at least 20% of the home's purchase price. That's not chump change. The median home price in the United States is $200,000, o 20 percent of that is $40,000.
Assuming you have your own rent, utilities, food, and maybe some credit card bills to pay each month, it may seem like a monumental task to save $40,000 in a lifetime: much less in the next couple of years. But don't throw in the towel! You have to put money down on your home, but you could need far less than 20% for a down payment.
Tips for How to Save Money for a House
Tip 1: Start Small
If you are the one of every eight Americans who has a savings account, great. Keep saving. But if your savings is non-existent, start small. Pretend your down payment is going to be $2,000, or just 1 percent of the new home price. Set a tight, but reasonable timeframe. Three months? Six?
When you reach that goal, set the bar again. Double it to $4,000 and see if you can do it in less than double the time it took to get $2,000.
Tip 2: Set Up a Secure Savings Account
Your down payment fund needs its own account. It is not your emergency fund or "my-kid-needs-braces" fund. This fund is not to be touched until you buy your house, so find one that's not easily accessible. $10,000 just sitting there waiting to be spent on a summer in Spain is too much temptation. Lock the funds away in an interest bearing account and forget about them. If you want a trip to Spain, start a fund.
Tip 3: Play a Game
Even if you think you have nothing to save, it's time to play a game. It's called "House Or ______."
It goes like this. Go through your spending and ask yourself:
- House or 500 TV channels - cut the cable
- House or visiting a barista 365 days a year - brew your own beans
- House or nth generation iPhone - old phone; new home!
You get the idea, so get busy. Whenever you want to buy something, play the game.
- House or lunch with the girls - PB and J for one
- House or fancy water - the tap is fine
- House or color and cut - long hair is cute
How Do You Save Money for a House on a Low Budget?
Ok, so you've been reading the "how to save money for a house" blogs, and they tell you to save $1,400 a month so you'll have your down payment in a year. Other people took their discretionary income and saved it up. They only got to eat out three times a week instead of five: poor them. But what about people who are broke like you? No one talks about how to save money for a house when every dime you make gets spent on necessities. Maybe you can squeeze out $10 extra on a good month.
Tip 4: Smaller Down Payments Are out There
Small down payments are not unicorns. They do exist. Like we said earlier, 20% is the nice-to-have down payment. That's what the lending community and financial gurus will tell you; and it's a great goal to shoot for. But if you can't make it, there are other options.
FHA loans, for example, guaranteed by the Federal Housing Administration, require a 3.5% down payment that is based on the home's purchase price. You don't even need great credit. You will have to pay mortgage insurance, however. Some other options to consider include:
- Veterans Administration loans, which don't require a down payment but are only given to eligible veterans
- U.S. Department of Agriculture loans for people in rural areas, which are available for 0% down if you meet the income guidelines
Tip 5: Refinance Your Student Loans
If your student loan is crushing your budget, you could refinance the loan to get a lower payment. In order to get a new loan with a lower interest rate, you have to have a stable income and meet credit score minimums, which is about 700.
The downside to this move would be losing eligibility for income-driven payment plans, loan forgiveness, and other programs. An income driven payment plan bases your loan payments on a percentage of your income. As your income increases, so does your payment amount.
If you decide you want to refinance, you could see more savings. If your private student loan is $50,000, and you have a balance of on the 10-year loan, then refinancing it from an interest rate of 8 percent to 4, at a 10-year term, would save more than $4,200 in interest and reduce your monthly payments by $200.
Tip 6: Extra Money Goes to the House
That work bonus, inheritance, tax refund, and any other windfall or extra money belongs to the house. If you can't give the down payment fund all of your found money, use the 50/30/20 budgeting tool. Divide the sum like this:
- 50% goes to pay off debt (lenders don't like debt either)
- 30% goes to your down payment savings
- 20% goes for fun
When you get your debt paid off, you can put those debt payments into the down payment fund. You can have a little fun and you should.
Tip 7: Use Technology to Help You Save
There are tons of apps out there that can help take the sting out of saving. Some apps will monitor your cash flow, and when it looks like you have extra, it automatically shifts a nominal amount of money to a savings account. Other apps round up your purchases and put the difference into savings. You'll be surprised how a dollar here and a few there will add up.
Tip 8: Ask for Money
Who needs less stuff and more money? You do. When is comes to how to save money for a house, friends and family could help. Don't be timid about sharing your plans for a house. Ask family for cash instead of birthday, Christmas, anniversary or other holiday gifts.
The worst they could do is buy you a gift you don't want, and even then you can sell or return the items for cash. If you got a gift card, you can sell it on Raise to get about 80 percent of its face value. You could also re-gift the gifts. Be sure to put your holiday shopping savings into your down payment fund.
Tip 9: Get Hustling
It's a side hustling world we live in. Get out there and earn some money. If it helps, use the 50/30/20 rule again to divide your earnings. Ideas for earning more dough include joining a ride share service or two, shopping for or delivering items to people, charging self-service scooters, mystery shopping, freelancing, working graveyard, working from home, or starting your own e-commerce business on eBay, Etsy or Amazon. There are opportunities out there; you just have to try something new.
How Much House Can I Afford?
This is the big question and our final tip for how to save money for a home.
Tip 10: Know How Much You Can Afford
There are two answers here. One is the standard rule that lenders use. It states that your housing costs should not be more than 36% of your total gross income. To get the number, you would divide your monthly mortgage payment by your gross monthly income. Lenders also look at:
- Your monthly income
- Down payment and closing cost funds
- Your monthly expenses
- Your credit profile
Your income is the money you receive in regular installments. This could be your paycheck, investment income, or other income that you receive each month. This helps determine what you can afford. Your funds for the down payment and closing costs are from savings or from investment income. You have other expenses. You could have debt, utilities, car payments, student loan payments and living expenses that will eat up your paycheck.
When you look at how to save money for a house, you want to get your credit score up. Credit score is huge money-saving factor. The better your score, the better the rate of the loan and the less interest you pay. Even a fraction of a percent matters when the loan is for 30 years and on hundreds of thousands of dollars. If your credit needs work, that FHA loan will accept a score of 580 or better. If your score is lower than that, a 10% down payment is needed.
The other answer to how much house you can afford depends on you. You don't have to have a house payment that's 36% of your income. Some people set the limit at 25%. They don't want to max out their income on a house.
We hope you feel a little more optimistic about how to save money for a house. We've shared 10 of our best tips to get you excited about building your down payment. Are you ready to start? The American dream is waiting. Decide how much money you want to save, where the money will come from and exactly how much home you can afford to buy. When you focus on a plan, everything else falls into place