Are you looking to buy a house for the first time? Saving money to buy a house can be a challenge, but with the right strategy, you can successfully save up for that down payment on your dream house.
Saving up to buy a house is an amazing accomplishment – but it’s not without its challenges.
First, you need to find the right property. Then, you need to save for a down payment. After that, you get to deal with banks, lenders, mortgage brokers, etc.
It’s a lot to handle if you’re buying a house for the first time.
But being a first-time home buyer doesn’t have to be scary – as long as you approach it with a thoughtful and critical eye.
Three 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 as you look to save up for a down payment on a house:
- Do Your Research
- Be Aware of All Costs
- Take Advantage of Programs
Then, after discussing these three 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 three pieces of information.
1. 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.
Mortgage lenders generally have no qualms with getting people to sign up for more house than they need.
Likewise, what you need compared to what you can afford also needs to be taken into consideration. If you’re planning on starting a family soon, you won’t want to buy a tiny 1-bedroom house.
To help figure out just how much home you can afford, you’ll want to know:
- 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, and it’s directly relevant to getting a home.
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.
2. Be Aware of All Costs
Next, it’s important to be aware of all costs associated with buying a home.
While saving up for a down-payment is great, 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 – meaning they don’t go into the value of the home.
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! That’s a hefty chunk of money.
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 can estimate closing costs for you.
3. Take Advantage of Programs for First Time Home Buyers
There are a number of programs that FTHBs can use to their advantage when purchasing a home.
This is one of the best ways you can save money if you’re buying a home for the first time.
Many of these programs offer exclusive advantages, such as greatly reduced interest rates; grants given 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.
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!