How To Save For A House
Lauren Nowacki8-Minute Read
January 12, 2021
Buying a home is a huge life achievement. Saving up enough money to put yourself in the best financial position to purchase a home should be celebrated just as much.
If you’re just starting to save for your dream home, the number can be intimidating. The idea of saving thousands of dollars can seem too lofty a goal. But once you learn how to save for a house, create a long-term plan based on the amount you need and begin saving little by little, you’ll begin to see just how achievable it is.
The Costs That Come With Buying A House
The first step in saving for a home is understanding the costs of buying a home so you know how much cash you’ll need throughout the home buying process and at closing. It isn’t just a down payment you’ll need to save.
Saving For The Down Payment
A down payment is an amount of money you pay to purchase your home and is a percentage of your home’s purchase price. It helps start you off with some equity in the home and reduces the amount of money you borrow. Depending on the type of mortgage you get, there will be a minimum down payment you must pay.
- Conventional loan: 3% down payment required
- FHA loan:5% down payment required
- VA loan: No down payment required
- USDA loan: No down payment required, but not currently offered by Rocket Mortgage®
While you can pay the minimum down payment, remember that the bigger down payment you have, the more equity you start with and the less you have to borrow. And if you put down at least 20%, you’ll also avoid paying private mortgage insurance (PMI), which typically costs about 0.5% – 1% of your mortgage balance each year.
While most financial professionals recommend putting down 20% to avoid that PMI, you can also remove PMI on a conventional loan once you have 20% equity in your home.
If you can’t afford a 20% down payment, you’re not alone. According to the National Association of REALTORS® (NAR), the average down payment for seasoned home buyers in 2020 was 16%. It’s even lower for first-time home buyers, who can’t use proceeds from the sale of their previous home. The average down payment for first-time home buyers was 7%. If you are a first-time home buyer or a low-income wage earner, there may be down payment assistance programs that can help you.
Saving For Closing Costs
The down payment is not the only expense you’ll need to pay when you purchase a home. You’ll also need to pay closing costs, which are fees that are associated with finalizing your mortgage. As the name suggests, they’re paid at closing along with your down payment. They can cost anywhere from 3% – 6% of your home’s purchase price and may include such fees as the appraisal fee, origination fee, title insurance and recording fees. The buyer is responsible for paying closing costs; however, you may be able to negotiate with the seller to have them pay some of your closing costs. These are known as seller concessions.
Saving For Moving Costs
In the flurry of searching for a new home, finding the one you love, making an offer, securing funding and getting your finances together for your down payment and closing costs, you may forget about the expenses that come after closing day. Moving costs can run from hundreds to thousands of dollars depending on how much you have to move, how far away you’ll be moving and if you’ll do a DIY move or hire a company to help.
Make sure you consider these costs when figuring out how much you’ll need to move into your new home. A few costs to include in your plan are moving boxes, packing tape and other supplies, movers or truck rental, moving equipment and fuel costs.
Do some basic research to determine what you’re really looking for in your first, or next, home and how much that will cost. A starter home – either a smaller, older home or a condo – might be a good choice for many first-time buyers. Based on your budget for a home, you’ll be able to estimate how much money you’ll need for a down payment and closing costs, two of the biggest expenses when purchasing a home.
Get the right home loan for you.
Best Ways To Save Money For A House
Saving a larger sum of money can seem impossible, but with a few strategies – and perhaps some sacrifice – you can hit your savings goals. Here are a few tips for saving for a house.
Start With The 28% Rule
Knowing how much to save for a home will be the first step. To determine how much home you can afford, some experts recommend following the 28% rule. This rule states that you shouldn’t spend more than 28% of your monthly gross income on your monthly mortgage payment. Your payment will include your mortgage repayment, property taxes and homeowners insurance. It doesn’t include other housing expenses like utilities.
Here’s an example:
If your gross monthly household is $6,000, your maximum monthly mortgage payment should be $1,680 – or 28% of $6,000.
To find out how much house you can afford with a $1,680, speak to a mortgage expert or play around with an online mortgage calculator, which can provide an estimate of your monthly mortgage payment based on such factors as your loan term, interest rate, property taxes, etc. You can change the information until you get the monthly payment you want. Then, you’ll be able to see how much home you can afford and what down payment you’ll need. If you know other information, like the interest rate and loan term you want, the more accurate your estimate will be. If you don’t, keep the average the calculator uses.
Remember that the 28% rule is a recommended rule amongst many. It may be harder to adhere to the rule if you live in high-priced markets. The best thing to do is look at your budget and see what you can really afford without having to live paycheck to paycheck or sacrificing other important things.
Determine Your Timeline
Time is the other important variable to factor into the equation. Remember, the longer you have to save, the easier it could be for you.
Knowing your timeline will help you determine how much you need to save each month to hit your goal. To figure that out, you’ll simply divide the amount of money you want to save by however many months you have until you’re ready to purchase a home.
Here’s a break down for figuring it all out:
Let’s say you plan on purchasing a $200,000 home and want to put down 20%. You’ll need $40,000 saved for a down payment. You’ll also need $6,000 – $12,000 (or 3% – 6% of the home price) for closing costs. That’s a total of $46,000 – $52,000 that you’ll need to save.
You’ve decided to give yourself 18 months (a year and a half) to save the money to purchase a home. If your goal is to save $52,000, you’ll need to save about $2,889 per month.
If you have trouble putting money away, set up automatic payments to your savings account. See if your bank offers this feature or ask your payroll department if you can split your direct deposit pay into two accounts. That way a certain amount of money will be put into a savings account without you even seeing it first.
It can be easier to save when you’re making more money, so consider asking for a raise, if you’ve been at your job for a while and feel like you’ve earned one. You could also take on a side hustle like driving for a rideshare company, walking dogs or freelancing. If you have an extra room in your home, consider renting it out on Airbnb or getting a full-time roommate. Just make sure your hard work doesn’t go to waste. Put every extra penny you earn outside of your regular income towards saving for a new home.
Revamp Your Budget
Take a look at your budget and see where you can cut back, while still living comfortably. That may mean decreasing your carryout budget and eating more home–cooked meals, or making coffee at home instead of grabbing it on the go. Can you work out at home for a few months instead of paying a monthly membership or cancel cable while you save? Making certain sacrifices now can really pay off later.
Save Your Windfalls
A windfall is a large sum of money that you gain, typically, unexpectedly. Common windfalls include a salary bonus, inheritance or even a winning lottery ticket. If you find yourself with a sudden financial windfall, it can be tempting to spoil yourself, but keep your savings goals in mind and put the money towards your down payment. This can be a huge help for you obtaining them.
Pay Off Debt
It can be tempting to put all of your extra money in your savings, but if you have debt, it may be wise to pay off some or all of your debt before saving for your down payment, if you have enough time to do both. When you no longer have a debt payment, the money you were using to pay your debt can be used to save for a home instead.
Paying off your debt – or at least paying it down – can have other advantages when you’re buying a home. For one, it can help improve your credit score, and most loans have a minimum credit score requirement. It also helps lower your debt to income ratio (DTI), which tells your lender how much more debt you’re able to take on. If your DTI is too high, you may not qualify for a loan.
A low DTI and higher credit score will help you qualify for a mortgage and save you money in the long run. Since a low DTI and high credit score make you less of a risk to lend to, you’ll likely get better rates and terms.
To pay down your debt or pay it off entirely, try the debt snowball or avalanche strategies. The debt snowball requires you to work toward paying off your smallest debt first while continuing to make minimum payments on your other debts. Once you pay off that debt, you move to the next smallest debt, putting all of your extra money towards paying off that next debt, and so on. The debt avalanche works the same way with one key difference. It requires you to work toward paying off your debt with the highest interest rate first, then move to the next debt with the highest interest rate and so on.
Avoid Lifestyle Creep
Lifestyle creep happens when you start earning more money and adjust your lifestyle to a higher income. This can cause people living paycheck-to-paycheck to still live paycheck-to-paycheck even after they increase their income – keeping them from saving even when they now have more money to do so. Avoid it at all costs.
If you have more money after paying off debts, get a raise or start earning more money, put all of the extra money toward your saving and continue to maintain the same lifestyle and budget as you did before.
Create An Emergency Fund
It may seem counterintuitive to save for something else before saving to buy a house, but having an emergency fund available for unexpected expenses can keep you from dipping into your home savings to cover emergency costs. While the recommended amount varies from $1,000 to 3 – 6 months of your monthly expenses, do what you feel most comfortable with. If you have insurance deductibles, you may want enough to cover those at the very least.
The Bottom Line
When you first start saving, it can seem impossible that you’ll be able to save enough money to make a hefty down payment and pay for closing costs. But with a little strategy, sacrifice and discipline, you’ll be able to reach your savings goal and be able to start house-hunting before you know it. The first step is learning how to save for a house. If you’ve come this far, congrats! You’ve completed the first step in your long-term plan. Now you just have to stick with the rest of it.
Starting to put all your ducks in a row? Check out our home buyer’s guide to learn more about the home buying process and how to better prepare for it both financially and emotionally.
Get the right home loan for you.
Get the right home loan for you.
First-Time Home Buyer Tips And Mistakes To Avoid
Buying your first home can be an overwhelming experience. Read this first-time home buyer guide to learn what to expect and how to prepare.