Buying a house is one of life’s big milestones. It solidifies your status as an adult and gives you the perfect foundation for starting a family.
Unfortunately, this step can often feel insurmountable. Your lack of savings and the inflated housing market can make you feel doomed to rent for the rest of your life.
We’re here to be the optimistic voice you need. Despite how hard it seems, buying your dream home is entirely within reach.
Read on for your guide on how to save money for a house. We’ll reveal the costs you need to consider and the best methods for getting the funds you need.
How to Save Money for a House — How You May Need to Save
When learning how to save money for a house, you should know what costs to consider. This way, you’ll be able to plan your budget accordingly.
Here are three important costs you should keep in mind:
The down payment is one of the most obvious expenses of buying a house. By putting down money upfront, you show your lender that you’ll be a reliable borrower.
See below to understand what your down payment might be.
20% of the Home’s Value
Some lenders and mortgage investors require a down payment of at least 20% of the home’s value. So, you will need to determine how much you’re willing to pay for a home and save accordingly.
3% or Less
The 20% rule isn’t universal. If you have good credit and find the right lender, you can qualify for a loan with a down payment of 3% or less.
Note that if your down payment is 3% or less, your lender may require you to buy private mortgage insurance (PMI). This insurance protects the lender in case you default on the loan. Once you obtain 20% equity in your home through mortgage payments, you will no longer need PMI.
No Down Payment
Want to avoid a down payment altogether? See if you qualify for government-backed VA or USDA loans.
While these types of borrowing don’t require down payments, know that they may come with other fees. For instance, when you get a VA loan, you will have to pay a VA funding fee at closing.
Aside from the down payment, you will also need to think about closing costs.
Closing costs tend to be around 2-5% of the mortgage loan principal. They include everything from origination and application fees to underwriting and title insurance costs.
It can be easy to get caught up in scrounging up money for the down payment. But because the closing costs can quickly add up, it’s important to account for these expenses.
Last but not least, you should consider mortgage payments. Ideally, you should have enough money to cover the first few mortgage payments. This way, you can relieve some of the stress of being a new homeowner.
Additionally, ensure that your income can cover future mortgage payments. Reduce your payments by extending your loan term, increasing your down payment, and keeping your credit score high.
The Best Tips on How to Save Money for a House
When you break down the costs as we did above, buying a house seems more manageable. It’s not like you need to come up with the home’s value all at once!
Of course, however, down payments, closing costs, and mortgage payments aren’t cheap. Read on for the best tips on how to save money for a house.
1. Create a Budget
Over half of Americans don’t have a budget to manage their money. This statistic is surprising when considering how helpful the strategy can be when working towards a savings goal.
So, if you want to save money for a house, you should hop on the budgeting bandwagon. Start by analyzing your bank and credit card statements to see where your money is going.
Of course, it will be difficult to cut back on essentials like rent and utilities. Make your budgeting goals easier by targeting nonessentials like takeout and vacations. When you cut down on these expenses, you can divert the extra money to your savings. Commit to saving a certain amount each month, and you’ll become a homeowner in no time.
2. Cut Out Bad Habits
Frequent takeout doesn’t only dig into your savings — it can also take a toll on your health.
So, if you need more motivation to cut back on your spending, see which of your habits negatively impact your life. Another obvious example is smoking, but you can even cut back on something like impulsive shopping. By only buying what you need, you’ll get rid of clutter and reduce anxiety.
Earlier, we mentioned that cutting back on essentials is difficult. But it’s not impossible.
If you’re serious about saving up for a house, consider downsizing. For instance, you might move to a smaller apartment or get rid of an extra vehicle. Many people see these sacrifices as small prices to pay for reaching their savings goal. In fact, you may even enjoy the reduced clutter.
4. Reduce Your Debt
When you reduce your debt, you’ll have more money to put towards your savings. It can also help you qualify for more favorable loan terms.
5. Ask for a Raise
Working toward your saving goal will be easier with a higher income. Performing well at work can open doors to conversations with your employer about what you contribute to the business, and how you can be fairly compensated. If a raise at your current workplace isn’t an option, there are financially lucrative hobbies you can keep on the side for some extra cash.
6. Find a New Job
Not getting the money you need from your current job? Consider opening your options. A career change can be a breath of fresh air while allowing you to increase your income.
How to Save Money for a House — The Bottom Line
This guide on how to save money for a house is hopefully your first step toward saving up for your dream home. Realize that you won’t only need enough for a down payment — closing costs and mortgage payments are also essential to keep in mind. Contact our experts at Associates Home Loan for more information on the best ways to save.