So you want to know how to save for a house. Congratulations! Maybe you got out of homeownership as a result of the Great Recession, and now want to get back in again. Or maybe you're just at that point in your life when you're ready to move on from renting. Either way, for many, owning your own home remains an integral part of the American dream.
This article is intended to help you achieve that dream by suggesting a step-by-step approach to helping you overcome what's often the biggest barrier to homeownership: the down payment.
Step 1: Determine if Buying is Really for You
No matter how keen you are to become a homeowner, you really need to prioritize your overall financial well-being. In other words, you'll want to make sure taking that big step is going to benefit you in the end. The most likely reason it could be a bad idea is the length of time you expect to spend in your new home. That's because buying real estate is an expensive business, with closing costs typically adding up to anywhere between 2 percent and 5 percent of your purchase price.
Moving Target 1
That's dead money, and it will take you a long time, typically years, to recoup it out of the savings homeownership brings compared with renting. Just how long varies wildly from place to place. So it's just as well LendingTree has a Rent vs Buy calculator that estimates the time it will take you to break even and start to make a profit.
If you think you're likely to move for any reason before that break-even date – perhaps because you'll have to relocate for work or will need a bigger place for a baby, or parent or in-law – you should think carefully before proceeding. You can still profitably use this waiting period by building your credit score, saving for a bigger down payment, and paying down your non-mortgage debts. All these actions should see you getting a better mortgage deal when you are finally ready to push the button.
If your work or life choices mean you're likely to move around a lot, you might consider buying a home regardless of future moves and then renting it out. Just make sure the mortgage you get provides that flexibility. For example, some insist you live in the home yourself for the first year and others may require you to inform your lender when renting.
One of the less attractive aspects of homeownership is there's no landlord to call if things go wrong. If your roof starts to leak, the HVAC stops working, or your windows are falling apart, that's down to you. And, depending on how you conduct your financial affairs now, that might mean you will need to enter a new phase in your life where you maintain a worthwhile emergency fund.
And, of course, there can be other financial headaches for homeowners. During and after the Great Recession, millions of Americans had "underwater mortgages," meaning they owed more on their home loans than the market value of their properties. Few are expecting a repeat of that anytime soon, but it's important to be aware of all the risks that come with homeownership.
Step 2: Determine How Much You Need to Save
Different Mortgages, Different Down Payment Requirements
If you're eligible under programs run by the Veterans Administration (VA loans) or the U.S. Department of Agriculture (USDA loans), you can stop reading now, since neither of those requires you to make a down payment. Not a cent. Having said that, you should be able to afford a more expensive home and might get a better mortgage deal if you put down something.
There are other ways in which the government can help homebuyers who find saving the standard 20-percent down payment too much. Mortgages from the Federal Housing administration (FHA loans) can be had with down payments as low as 3.5 percent and Freddie Mac and Fannie Mae each have programs that require just 3 percent down for qualified buyers. Meanwhile, you may be eligible for assistance with your down payment from your state through its Housing Finance Agency. Find yours using this online look-up service.
There is a downside to these lower down payments: To protect lenders from the additional risk arising from possible defaults, you're almost certain to be charged for private mortgage insurance. This could see you paying a premium every month for the life of your mortgage, making it better to put down at least 20 percent if you possibly can, though, that's not an option for many.
Research and Plan
Think through how much you can save each month toward your down payment and closing costs. Don't be wildly optimistic, or you'll risk missing targets and becoming demoralized. But don't be too timid either, or you may never achieve your goal. Be optimistic, but realistic.
Start off with the LendingTree home affordability calculator. If you give it some information (gross annual income, the down payment you expect to save, your monthly payments on non-mortgage debt (credit cards, store cards, student loan, auto loan and so on), credit score, and zip code), it'll give you an idea of the price you can afford to pay for a home.
Now, you need to research home prices in the area in which you want to buy. Browse real estate listings so you can see what you can get for your money. You might find yourself in a loop here. If you discover the home you want is more expensive than you can afford, you may want to go back to the home affordability calculator to model some alternative scenarios, perhaps ones where you've improved you credit score, paid down more of your existing debt, or saved a bigger down payment.
Moving Target 2
According to CoreLogic, the year-over-year increase in home prices nationwide in January 2017 was 6.9 percent. That's roughly three times the general inflation rate, which might well be the basis on which your salary hikes are calculated.
All this means you need to set your down payment saving sights as if you were shooting at a moving target: in anticipation of where that target will be when you pull the trigger. So, for example, if you think you'll have saved enough to buy the home you want in two years, increase the amount you save by roughly 14 percent, or add 12 weeks or so to your expected saving period.
Step 3: Determine Your Timeframe for Buying a House
By now, you've worked out how much you need to save for your down payment and closing costs, and how much you can afford to put aside each month. You can simply divide the former by the latter to see how many months you are away from buying your home.
If that's too long a wait, it's time to see how you can increase the rate at which you save. You might be able to do so by increasing your earnings (see below), but a better place to start might be with your outgoings.
Creating a Budget
Drawing up a budget may be key when working out how to save for a house. Very few people enjoy doing it because most find budgeting boring and hard work, but, if you're serious about buying your own home, you should think of the time spent budgeting as the first of a number of sacrifices you have to make to achieve your goal.
You need to know precisely where all your money goes, which means taking a snapshot of your spending – all your spending. Use a spreadsheet (or a large piece of paper) to list all your regular outgoings: rent, utilities, travel, loan/card payments, online and cable subscriptions, and so on. Then crawl over your card and checking account statements to see what you're buying within your main spending categories: groceries, clothes, gas, lunches, take-out deliveries, coffee-shop purchases, date nights, girls/boys nights out ... everything. If you use cash much, use your smartphone or carry a notebook for a month to note everything you spend.
Step 4: How to Make Room in Your Budget
Increasing your saving rate inevitably means making lifestyle sacrifices. Now that you know where your money's going, you are in a position to decide where to make those sacrifices. As long as you keep your ultimate homeownership goal in mind, you might find cutting back on spending less painful than you think.
Here are some ideas for budget savings that could add up to thousands a year:
- Take sandwiches and coffee in a vacuum flask to work
- Eliminate date nights and partying – or at least halve their frequency
- Turn the thermostat down a couple of degrees in winter – and put on a sweater
- Leave the air conditioning off for more of the summer – a couple of fans could keep you comfortably cool when it's not unbearably hot
- Cut back on new clothes – last year's trends still look great on you
- Drop cable and Netflix – until you're in your new home
- Cancel newspaper and magazine subscriptions – there's plenty of free content online
- Don't change your car
- Agree with your spouse/partner you won't buy each other any gifts or eat in fancy restaurants until you're homeowners
- Be thrifty over the holidays
- Have staycations
- Buy fewer branded and designer goods and more generic labels
- Resist impulses to treat yourself
And, of course, any windfalls you receive (tax refunds, bonuses, cash gifts, inheritances) should go straight into your savings account.
Step 5: Automate Your Savings Plan
Unless you're exceptionally organized and self-disciplined, you may find savings left in your checking account being eaten up by day-to-day living expenses. So don't leave them there!
Instead, set up an automated transfer that will see your monthly savings target swept into a savings account within a day or two of receipt of your salary. That should help you avoid temptation.
When You Need Flexibility – Or Not
Of course, you can transfer money back into your checking account in an emergency. No need to beat yourself up over that. But, if you're doing so frequently, that should be a red flag. It may be you're spending more than you promised yourself you would and should cut back. Or perhaps your original spending goal was unrealistic and needs to be revised down. Either way, it's time you had a serious revision of your budget and spending habits.
Step 6: Increase Your Income
Even the busiest person can make time for really important things. And right now, your biggest priority is boosting your ability to save, which can be greatly assisted by a boost in income.
In many situations, you may be able to increase your income by asking your current employer for a raise. If you have some additional time, you may be able to take a second job, such as bar work or catering for parties and events. If you have a skill, such as writing or bookkeeping, you may be able to find people who need those skills and who are willing to hire you as a consultant/freelancer. There are also opportunities with companies such as Lyft and Uber to become a driver during any off-time that you might have.
But, there are plenty of companies offering other sorts of work. Here are just a few:
Of course, there are hundreds of others. Do an internet search for "best ways to earn extra money" and click through on reputable sites. It's best to use trusted sources that recommend companies because there are plenty of sharks in these waters.
It can be hard work becoming a homeowner but ask most who are and they'll likely tell you it is well worth it.