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Making small, steady changes that add up over time is how to save money for a home.
Buying a new home is a great goal to have, but first you’ll face a big barrier: the cost. When you first run the numbers sometimes it seems like you’ll never be able to afford a home, but you can. We’ll help you figure out how to save money for a home faster than you think.
It helps to have a target to save toward, so your first step is to figure out how much money you actually need to save. You can think of the cost of home buying in two parts:
Homes aren’t cheap, and that’s especially true right at the beginning. The upfront costs of buying a home are what keep a lot of would-be home buyers in the renting game. Everyone’s different so your numbers might be more or less than your neighbor’s, but in general, here’s what you should estimate to start:
Once you’ve actually bought the home, it’s a good idea to make sure you can actually afford it going forward too. That’s why it’s a good idea to estimate your monthly cost for these things:
Getting the most affordable mortgage you can won’t directly help you save for a home, but it’ll help you afford your dream home sooner and keep the costs down in the long run too. In order to find the cheapest mortgage, here’s what you can do:
Your credit score is one of the biggest factors in determining how much you’ll pay for your mortgage. The unfortunate thing is that many people’s credit reports have errors on them.
And even if it’s accurate, checking your credit score early on with sites like Discover Scorecard can help notify you about things you can improve. In most cases it’ll take some time to build your score, so getting a head start on it now can give you a leg up by the time you’re ready to apply for a mortgage.
It might seem counterintuitive, but paying down your debt can help boost your odds of approval for a mortgage, especially if you’re carrying a lot of debt.
Many mortgage programs even have requirements for this in place, limiting your debt-to-income (DTI) ratio to 43% or less in order to be qualified for a mortgage. This means that if more than 43% of your monthly income is going towards debt payments, it’s unlikely you’ll be approved.
Again, at first glance it seems like saving more money might hinder your homeownership goals. And it’s true that it might take you longer to save, but the rewards are well worth it.
You’re more likely to be approved for a mortgage if you make a larger down payment. You’ll start off with more equity (i.e., the portion of your home that you own).
Most conventional mortgages even require at least 20% down, or require you to pay expensive monthly PMI payments. The loans below require a smaller payment, but they still have other hefty costs that you can avoid by making a bigger down payment:
When you apply for a mortgage, lenders will check your employment history. But what if you employ yourself? In this case, most lenders require at least two years’ worth of tax returns from your business. If you’ve just started up full-time, this means it might be a couple years before you’re able to get a mortgage easily.
Now that you have an idea of how much to save based on your homeownership and mortgage costs, you can create a plan for how to get there.
Your budget is your roadmap for how to save for a home. It contains everything you need to save money, starting with your income and expenses. The difference between these numbers is how much you’ll actually be able to save each month.
So whether you’re budgeting every month or not, you at least need to know what these numbers are. Take some time to write down your budget if you haven’t already, and look for ways you can increase your income and decrease your spending.
It’s a good idea to keep your down payment fund separate from your checking account and even your emergency fund. If you’re often tempted to withdraw money from it, try opening an account at a different bank to provide an additional layer between you and your money.
Even better, you can keep your savings in a high-yield savings account so you can earn more interest. It’s also a good idea to automate your deposits so that your down payment savings grow according to plan regardless of what you’re doing.
If you’re like most people, chances are you don’t have a big gap between your income and your expenses that will allow you to save. It’s frustrating, but know that it’s also totally normal. Unless you have rich family members, most of us will have to do the following in order to save for a house:
It’s sort of a cliché personal finance tip, but it works. Look through every line item in the budget you made above and brainstorm ways that you can reduce the cost, if possible. An easy win is to find things you aren’t using any longer, like old newspaper or digital subscriptions, and cancel them.
You can also get creative to replace your current expenses with cheaper options. For example, the average family plans to spend almost $1,000 this year for the holidays. You can save that money instead by focusing on handmade items and baked goods as gifts, for example. Here are some other ideas:
If you have a lot of debt, an overlooked area is refinancing your auto loans, student loans, or credit card debt for cheaper interest rates. This makes it so more of your money actually goes towards paying down the balance, versus into the lender’s pocket.
This can also help you pay off your debt faster so that you’re more likely to qualify for a mortgage, especially if you have a lot of debt.
You can only cut so many expenses out of your life. That’s why earning more can be a more powerful way for how to save money for a home. It can amplify your savings a lot faster so you’ll be able to afford your dream home in a shorter period of time.
It’s a good idea to focus on a way to make money you enjoy, or at least a side hustle that passes the time quickly. If you don’t enjoy your side hustle, it’s less likely you’ll be able to stick with it so you can earn more money.
Adding in small bits of cash here and there into your savings account is a slow process for most of us, and it can seem like you’ll never be able to afford a home of your own. But just like any long-term savings project, such as your retirement savings, it’s important to celebrate your small wins along the way.
For example, a lot of people really enjoy printing out coloring charts to track their progress towards savings goals. You can also get crafty, such as creating a chain of paper links for certain milestones. Other people enjoy treating themselves with a small delight, such as a nice drink or a dinner.
Either way, celebrating these small wins will help you stay on track for the long haul.
Saving up for a home can be a frustrating and lonely journey. Sometimes it seems like all your friends, family, and coworkers are buying homes for themselves, while you can’t. You may even be frustrated to see home prices going up while you browse the NMLS.
The important thing to remember is that as long as you’re saving at least some amount of money every money, you are making progress towards your goal. It might not happen tomorrow, but just like taking a single step at a time, you’ll reach your destination before you know it.
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