save up to buy a home

How to Save Up to Buy a House for the First Time

Erik Financial Education, Real Estate Leave a Comment

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Saving up to buy your first home or rental property is a great goal. Saving up to buy a house is an amazing accomplishment – but not without its challenges.

First, you need to find the right property.  Then, you try to save for a down payment.  After, you have to deal with banks, lenders, mortgage brokers, etc.  It’s a lot to handle if you’re a first time home buyer.

However, buying a home doesn’t have to be scary – as long as you approach it with a thoughtful and critical eye.

Here are some tips on how to save up to buy a home and what to consider when doing so!

3 Steps to Take When Saving Up to Buy a House

For the purpose of this article, there are 3 steps I want to focus on for you as you look to save up for a down payment on a house:

  1. Do Your Research
  2. Be Aware of All Costs
  3. Take Advantage of Programs

Then, after discussing these 3 steps, I’ll share with you some quick hitting saving money tips to help you increase your savings.

Let’s dive into each of these 3 pieces of information.

Do Your Research

The first step to take before you even decide to save for a new home is figuring out how much home you can afford.

There are a number of ways to do this:

  • Getting an estimate from a bank or credit union
  • Doing the math yourself
  • Using an online calculator

While mortgage lenders are all too willing to help you figure this out, keep in mind that what you want and what you can afford are two very different things.

Likewise, what you need compared to what you can afford also needs to be taken into consideration. Mortgage lenders generally have no qualms with getting people to sign up for more house than they need.

To help figure out just how much home you can afford, you’ll want to have a clear idea of your income, the cash you have on hand, your recurring expenses and your credit profile.

You should be familiar with these as a lender is going to ask for this information too.

You can also use the 36% rule to determine how much home you can afford.

The 36% rule states that, on average, you should aim to spend no more than 36% of your gross income on your mortgage expense and debt payments.

For example, if you gross $3,600 a month and have recurring student loan debts of $500 a month, you’ll want to spend no more than $796 per month on your mortgage.

$3,600 X 0.36 = $1,296.00 – $500 recurring debt = $796

You can use this handy calculator from Nerd Wallet to estimate it for you.

The thing to keep in mind most is that you know your financial situation best – don’t let anyone pressure you into something that doesn’t feel right.

Be Aware of All Costs

Next, it’s important to be aware of all costs.

You may be working toward saving up for a down payment on a home, which is great. But, did you know there are many other property and loan related fees associated with buying a home that are not recoverable?

These property and loan related fees are called closing costs. Closing costs are fees paid (usually by the purchaser) to finalize the sale of the home. Some of these fees are rolled into the mortgage, while others are paid before the house is purchased.

Typically, you can expect to pay between 2% to 5% of the mortgage loan amount on closing fees.

If you’ve never bought a home or haven’t heard of closing costs, these additional expenses can throw you for a loop.

Some common examples of closing costs include:

  • Appraisal fees
  • Home inspection fees
  • Application fees
  • Loan origination fees
  • Escrow fees
  • Document preparation fees
  • Title search fees
  • and more!

These fees add up, and many of them are one-time fees that don’t build equity.

For someone purchasing a $100,000 home and putting 20% down and paying a 4% interest rate and using a mortgage broker, it’s estimated you would pay over $5,000 in closing costs!

When you’re saving up to purchase a house, it’s essential you take all of these closing costs and fees into consideration in your budget and savings goal.

You don’t want to get caught with your pants down if you fail to factor in one (or multiple) costs.

Here’s a calculator from NerdWallet that estimates closing costs.

Take Advantage of Programs

If you want to save money buying a home, you’ll want to take advantage of offers that are exclusive to first time home buyers.

There are a number of programs that FTHBs can use to their advantage when purchasing a home.

Some of these programs offer greatly reduced interest rates; others give out grants to help with closing costs and down payments; others help vulnerable populations like veterans and native Americans in securing funding for purchase.

No matter your situation, if you’re a FTHB, there’s likely a program that can help.

Some examples of programs offered to first time home buyers include:

  • HUD first time buyers program
  • FHA loans
  • USDA loans
  • VA loans
  • and more!

Depending on where you live, you may have different offers in your area.

Here is a list of some of the federal programs that help first time home buyers by state.

Check out the list – you may qualify!

How to Practically Save a Down Payment for a House

Once you know what you can afford to spend on a home, you’ll want to start saving for a down payment.

The easiest way to save for a down payment is to decide how much you’d like to put down, then divide that number by the amount of months you have until you plan on buying.

For example, if you can afford a $100,000 house, want to put 20% down, and you plan on buying in one year, you’ll need to save $1,666.66 a month.

$100,000 X .20 = $20,000 down payment / 12 (months in one year) = $1,666.66

Depending on how much house you can afford, how long you have to save and your income and expenses, this number may be easily doable or very difficult.

Something else to keep in mind is that the more you put down on a house, the lower your mortgage payments will be.

You can also avoid having to pay private mortgage insurance (PMI) if you put at least 20% down on your home. PMI is added to your mortgage payment whenever you put less than 20% down. It’s used to protect the lender against a loss in case the borrower defaults.

9 Tips on Saving Money for a Down Payment

Here are some tips on how to save some additional money you can put down towards a house.

  • Set a target amount and stick to it.  Just because you can afford something bigger and nicer doesn’t mean you have to do so.
  • Cut any unnecessary costs. Go through your credit card statement, bank statements, etc. looking for services you don’t use, or don’t care about and cancel them.
  • Pick up extra shifts or overtime at work, or get a second job one day a week.
  • Take on simple side gigs, like dog-walking, cat-sitting or babysitting.
  • Store your savings in a separate account to keep you from spending it on something frivolous or expensive.
  • Automate the savings process.  Now that you’ve calculated the amount you need to save per month, you could have that automatically transferred to your savings account the day you get paid. You won’t miss money you never had.
  • Save any unexpected money. Whether it’s your tax return or Christmas money from your grandma, put any additional money you get into savings to reach that goal faster.
  • Cut back on spending. You can go generic, as that’s a great way to save money without changing your shopping habits.
  • Have an extra room in your home?  Throw it up on AirBnB.  If you live near a music or sports venue, you could even rent out your driveway as a parking space on events days.
  • Declutter and sell your goods on eBay, or have a yard sale.

With all of these tips, I’m sure there’s something in there for you to utilize to help save more money!

Making Saving up for a Home Stress-Free with these Tips

Buying a home can be a big expense and stress, but depending on your own circumstances, it can be a good investment.  If you’re a first time home buyer, you can make the experience much more pleasurable by doing a little work beforehand.

By researching how much home you can afford, saving money for a down payment, and taking advantage of offers for first time home buyers, you’re far more likely to make it a pleasant experience.

Purchasing a home is one of the major financial decisions you will make in your life – don’t take it too lightly! Best of luck!

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