11 Tips on How to Save for a House
Buying a home is a crucial financial goal for many people. It requires discipline, patience, and a well-planned strategy. Saving for a down payment can be disheartening, especially starting from scratch.
In this article, we'll explore some of the best ways to save for a house, including tips on how to cut expenses, increase income, and take advantage of specialized savings accounts and government programs. We'll also discuss the importance of creating a realistic budget and timeline and how to stay motivated and on track throughout the savings process. Whatever your plans for home ownership are, this article will provide you with the knowledge and tools you need to make your homeownership dreams a reality.
How Much Savings Must I Have to Buy a House?
Are you wondering how much your down payment should be? Ideally, you should put down at least 20% of the home's price to avoid private mortgage insurance (PMI) . A PMI is a fee that protects your lender and not you if you stop making mortgage payments. A 20% down payment for a $200,000 house costs $40,000 ($200,000 x 20%).
Whatever you do, never purchase a house with a monthly payment that exceeds 25% of your monthly take-home pay for a 15-year fixed-rate mortgage with the lowest overall cost. A smaller down payment of 5–10% is also okay if you are a first-time home buyer. However, you will have to pay PMI then. Avoid risky loans like FHA, VA, and USDA.
With a better idea of how much to save, here are 11 tips that will help you save more.
1. Build a Better Budget
Budgeting is the first step in saving. If you have no idea where your money goes every month, it’s difficult to divert money to your down payment.
First, determine your monthly income and whether your spouse or partner will contribute to your down payment. Then, gather all your bank statements and credit card payments. It is important to analyze where you spend the majority of your money.
Take note of how much you typically spend on essentials like rent, student loan payments, and utilities. Figure out how much you typically allot for non-essentials like entertainment and dining out. If you want to avoid manually calculating your expenses, consider using a budgeting app that automates the process for you. Getting help from a financial advisor can help you gain a better understanding of how your budget should look.
Identify areas where you can cut back after categorizing your expenses. Decide on a definite (yet realistic) budget for each category and stick to it. Make sure you budget a specific dollar amount that you can use for your down payment each month. Think of your savings as a non-optional expense.
2. Consider Downsizing
Downsizing is a great way to save more money for a down payment. You can downsize your life by reducing expenses and living below your means while saving for your home. When you downsize, you are spending money only on necessities and diverting the extra money into a savings account. You essentially practice minimalism by spending your money only on the things you need.
It is common for people to practice minimalism as they save for a large purchase. You can downsize by moving into a smaller apartment, selling one of your family's unwanted vehicles, or moving to a more affordable neighborhood. It may even turn out that you enjoy living a simple life.
3. Reduce or Cut Out a Bad Habit
You can save hundreds of dollars by reducing or eliminating a bad habit. Consider quitting these unhealthy habits and diverting the money to your down payment fund.
- Impulse buying: If you tend to buy things on impulse, whether in person or online (let's face it, who doesn't like receiving deliveries? ), you may want to consider cutting down on these purchases. Try to unsubscribe from marketing emails to avoid seeing deals constantly. It will save you money and keep your home clutter-free.
- Getting takeout: Fast food and takeout are great, no doubt about it. However, it's not so easy on our wallets. Rather than ordering out, try cooking a few meals at home each week.
4. Ask for a Raise
Are you finding it difficult to save money after you get paid because there is not much left over? Perhaps it is time for you to ask for a raise. Using these tips will help you increase your chances of asking for a raise.
- Time it right: Setting yourself up for success starts with timing your salary conversation. Do not ask your manager for a meeting when working on a hectic project or when time is at a premium. It is best to ask for a raise during your annual performance review - but the weeks following the completion of a big project are also excellent choices.
- Come prepared: Never enter a salary discussion unprepared. Compile specific performance data and results from your past projects to describe how busy you have been and what you have been doing. By doing so, your manager will see that the company cannot afford to let you go.
- Always be confident but grateful: Your attitude during your salary discussion meeting matters nearly as much as what you say. Confidence is essential, but so are gratitude and enthusiasm. Let your manager know that you see yourself growing with your company and are eager to take on more responsibilities.
5. Identify What Other Employment Options Are Out There
Although it is not always possible, switching jobs and getting a higher-paying salary can help you save money for the down payment on your home.
Look at job posting sites and salary comparison websites to determine whether you earn as much as people in similar roles. If your salary is below average, use your findings as your leverage to ask for a raise or a promotion.
If you are not in love and passionate about your job or can’t get a raise, consider looking for a higher-paying job that matches your qualifications.
6. Skip a Vacation
It can be a wonderful experience to explore a new destination. Unfortunately, it’s also quite an expensive one. On average, a family of four spends about $4,500 on vacation, a big amount of cash.
Consider saving that money for a down payment and enjoying a staycation in your city instead. Here are a few suggestions that may inspire you.
- Explore historical sites near you: You don’t have to travel all the way to London or Milan to experience the culture. The United States is a country with a rich, exciting history. You can inject a little culture into your life at a fraction of the cost by visiting a museum, nature preserve, or heritage site near you.
- Plan an at-home spa day: Have you been dreaming of a spa day? Take advantage of an at-home facial kit, a bubble bath, and some candles to recreate the experience yourself at home.
- Try a local cooking or art class: Many travelers believe that one of the best things about a vacation is trying something new and seeing what it is like. If you want a low-cost learning opportunity, consider trying out a new dish at a local cooking class or creating artwork at your nearby recreational center.
7. Pick Up a Side Hustle
In the on-demand “ gig economy ,” earning money on your own time is easier than ever through a lucrative side hustle. Listed below are a few suggestions for finding a great side hustle.
- Pick up some freelance work: Freelancing allows you to complete individual gigs for your clients straight from the comfort of your home. You can earn money on your schedule as a writer, photographer, artist, musician, and more by contracting out your skills.
- Drive for a ridesharing company: Some ridesharing companies, such as Uber and Lyft, offer excellent side hustle opportunities because they allow you to identify how little or how much you want to work. If you have a standard 9-to-5 job, it may be possible for you to maximize your earnings if you drive on weekends and at night. You will also earn more money per mile during these periods because demand for rides and prices are at their highest.
- Pet sit or walk: Everyone loves and adores their furry friends, but not all pet owners have the time to walk and care for their dogs. Pet sitting for business travelers and vacationers can be a lucrative and exciting side hustle if you love animals.
- Test apps and websites: Companies rely on everyday users to test websites or applications to ensure they’re user-friendly. Sign up with a testing company such as UserTesting or Testbirds and earn money when you share your feedback.
8. Chop Down Your Debt
If you plan to buy a home, it might seem counterintuitive to divert your extra income toward your debt. However, the first thing lenders look at when considering you as a mortgage candidate is your debt-to-income ratio (DTI) .
Having more debt makes you less favorable as a candidate. There is a possibility that you may have to pay more interest and a higher down payment requirement.
Take the time to pay off your debt before you apply for a mortgage loan. Determine how much you owe on your auto, credit cards, student, and personal loans, and devise a plan to pay them off.
9. Rent Out Your Parking Space or Spare Room
Is there an extra bedroom in your apartment or a spacious parking space? If you have this, consider listing it on an online hospitality website like Airbnb. With Airbnb, you get to decide who uses your space and when.
You can approve guests and dates in advance and only rent your spare room when convenient. You can even block dates when your rental is unavailable if you have a friend or family member visiting.
Residing in a heavily populated area can be a great source of extra cash on the weekends. You may want to consider renting out any of your assigned parking spaces with an app like JustPark if you live in an urban area where parking is at a premium. JustPark allows you to rent out your parking space like you would rent out your spare room or parking space on Airbnb.
10. Ask for Help
If you are saving up for something as substantial as a down payment on a home, do not be embarrassed to ask for help. More and more home buyers are raising their down payments through applications and websites.
You may want to ask friends and relatives to skip physical gifts on special occasions and holidays in place of money. It is becoming a more common practice at events like weddings and baby showers.
Remember that special rules exist on using gift money to pay your down payment. Before you accept funds for your new home's down payment, identify your mortgage loan types and be familiar with the rules surrounding gift money and down payments.
11. Automate Your Savings
Automating your savings may be a good idea if you're prone to impulse shopping. Here is how it works: first, decide how much you want to save each month for your down payment.
to have a separate savings account automatically withdrawn from your primary account, get in touch with your bank. Each month, your bank will automatically withdraw money from your account and deposit it into another one.
It can be helpful to people who have trouble managing their money. By making your money less accessible, it is easier to resist buying unnecessary things. Always schedule your withdrawal on your payday or when you believe you will have enough money. Overdraft fees can put a significant dent in your down payment fund.
Frequently Asked Questions
Where Should I Stash My Down Payment?
You can deposit your down payment in a simple money market savings account. You may not make much money on interest, but you will not lose money either. Remember: Saving for a down payment is not the same as investing for retirement. Saving a down payment should only take a year or two, so keep your savings in an easy-to-access place.
When Should I Start Saving for a House?
Start saving for your own house as soon as you think you are ready! It will probably take some intense saving for a year or two only to save for a down payment, so you should start saving as soon as possible. For reference: You are only "ready" if you are debt-free and have an emergency fund of 3–6 months of living expenses.
What Should I Do If I Cannot Afford a House?
Trying to purchase a house when home prices keep rising can be frustrating. However, if you have the right plan, you can accomplish it. One big thing that prevents people from saving for a house is debt. To begin with, you should pay off all your debts.
If you want to buy a house that suits your needs, you should never take on a 15-year fixed-rate conventional loan with a monthly payment greater than 25% of your take-home pay. Ideally, you should save at least 20% for the down payment. Once you’ve set a down payment goal, saving towards it will take time. Invest at least one or two years of your time and energy into saving. You should hire an experienced real estate agent with a good understanding of your area once you have saved enough down payment. A good agent will work hard to find a house within your budget.
The Bottom Line
To save money, you should have a solid plan set up. But first, you must determine how much you need for the down payment. While many buyers believe they need a 20% down payment to buy a home, buying a house with as little as 3% down is possible.
A VA loan, for example, allows you to buy a home with no down payment. Research your loan options and estimate how much money you’ll need before you begin saving for your home.
Whether you have already started saving for your house or are starting to save for the first time, there are many ways to save money for a down payment. Establish a household budget that includes setting aside money each month for your down payment.
You may also want to consider moving into a more lucrative career, taking on a second job, or downsizing your home to save money. All these methods can help you put away more money, including reducing your debt, asking friends and family members for help, and renting out an extra bedroom.
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