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How to save for a house: The complete guide

Aly J. Yale
The Mortgage Reports contributor

Most people would buy a home if it weren’t for this one thing

Homeownership has long been the American Dream. But for many, it seems that money (or the lack thereof, more specifically) is the only thing standing in the way of that dream.

According to a recent survey from mortgage lender Mr. Cooper, 70 percent of Americans who don’t currently own a home say they want to buy one. More than half of those people lack the funds for a down payment, though.

What’s worse? Another 43 percent don’t have any financial plan to save for that down payment—nor any of the other costs associated with home buying either.

Fortunately, it’s never too late to get started. If you’re one of the many aspiring homeowners looking to buy a house, use this guide to prepare, save and achieve your goal (maybe even sooner than you think.)

Ready to buy a house? Start here. (Aug 20th, 2019)

How much money do you need?

Before you can begin saving up, you first need to know how much you’ll need. To start, use a mortgage calculator to get a feel for how different priced properties shake out in terms of monthly costs, down payments and more.

Experts generally recommend spending about 30 percent of your monthly income on housing (or less). So if you make $5,000 per month ($60,000 a year), you should cap your potential monthly mortgage payment at $1,500. According to the calculator, if you were to secure a 30-year loan at a 4.25% interest rate, as well as put down a 20% down payment, you could afford a home priced at around $226,000.

Keep in mind, however, that fiscally responsible home buyers and those who have small monthly debt payments can typically afford to spend more than 30% of their income on their home. Some are comfortable spending 40% or more.

Just be sure to make a realistic budget. Make sure you’ll be able to make your payment comfortably each month.

Here are how some other scenarios break down:

  • $100,000 salary: With a 4.5% mortgage rate, a 30-year loan and a 15% down payment, you could afford a home priced at $451,000
  • $80,000 salary: With a 4.33% mortgage rate, a 30-year loan and a 10% down payment, you could afford a home priced at $330,000
  • $40,000 salary: With a 4.25% mortgage rate, a 30-year loan and a 5% down payment, you could afford a home priced at $133,000

You can also use the calculator to factor in existing monthly debts you might have, as well as property taxes for your area and other factors.

Yeah, but what about upfront costs?

But the above is just a guide to find a monthly payment that’s affordable. To determine how much you’ll need up front to purchase a property, you’ll need to factor in other costs, like your down payment, required reserves and taxes. Ultimately, the math should look something like this:

[Home Price] x [Desired Down Payment Percentage] + [2-3% of the Home’s Price for Closing Costs] + [2 Months of Mortgage Payment, Including Principal, Interest, Taxes, Homeowner’s Insurance & HOA Dues]

Using real numbers, here’s what it might look like if you were buying a $350,000 home.

Item Amount Calculation
Home Price $350,000 Desired home price
Down Payment $17,500 5% down payment
Closing Costs $7,000 Estimated 2% of the home price
Reserves $4,160 2 months’ full home payment of $2,080
Total $28,660 Total of all upfront costs

Keep in mind that two months of reserves aren’t required on all loans or by all lenders. Having that much is still smart, though, as it gives you a financial safety net in case of emergency.

If your total up-front costs seem daunting, there are several ways you can go about lowering them, including using a zero-down mortgage loan (more on that later) or asking the seller to contribute to your closing costs.

Speak with a lender to see how much you need upfront for a home. (Aug 20th, 2019)

Determine your timeline

Once you know how much you’ll need to save up, you’ll need to start thinking about your home buying timeline. Think you want to buy a house in two years? Take the total amount of up-front costs you’ll have to cover (say $30,000) and divide that by 24 months.

That breaks down to $1,250 in savings per month. Is that a realistic number you can hit? If not, could you add another six months or a year to your timeline make saving up more manageable?

Remember, these funds don’t have to come straight out of your checking account or paycheck.

Think of other ways you can save cash, too—like cutting back on eating out, reducing your water bill and coupon-cutting. Could that help you add an extra few hundred to your savings each month?

Could you live on half your income for the next year and funnel away the rest?

If you’re set on a short home buying timeline (you’ve got a life change coming up or your lease is running out), then you can opt for more extreme measures.

Could you live on half your income for the next year and funnel away the rest? Could you take on a second job or after-hours gig to make extra home buying cash? If you’re dead-set on buying a house soon but still have a bunch to save, you’ll just have to get creative in hitting those goals.

How to save for a house: Sure-fire saving strategies

Now that you know when you’re buying and how much you need to save each month to get there, it’s time to actually start saving. There are many routes you can take to save up, from cutting corners and luxury spending to reducing overall living expenses and penny-pinching at every turn.

Here are some of the most tried-and-true approaches:

  • Reduce your debts – Take the Dave Ramsey approach to debt, and pay off your biggest balances first. Then, whatever you save in interest on those accounts, put directly into savings (or your designated home buying fund.) You’ll be surprised at how fast it adds up.
  • Automate your savings – Set up automated deposits into your savings account so you don’t forget. You can either have XX amount deposited directly from your paychecks each week/month, or schedule a regular transfer from your checking account to your savings. Just make sure it’s an amount that won’t put your account in the red or make it hard to cover your living expenses.
  • Start a side hustle – If you have the time, consider getting a side job like driving for Uber, Lyft or DoorDash, or doing errands via TaskRabbit, Favor or Shipt. Make the commitment to put all your side gig income straight toward into savings. Even just a couple extra hours of work each week can make a big financial impact after a few months.
  • Get a roommate – Bringing in a roommate can help reduce your existing living costs while you save up to buy your home. It cuts down your overall rent, bills and other associated costs—especially if you share transportation and pool together on groceries. If you really want to be extreme and save a ton of money, move back in with your parents!

You can also try one of the many savings apps that are out there, like Mint, Acorns or Digit. Some of these help you budget, cut corners and automate your savings, while others round off your purchases to the nearest dollar, putting the “spare change” into a designated savings account.

Either way, you get an easy, on-the-go way of saving up for that home purchase.

Choose your mortgage loan carefully

The type of mortgage loan you choose will greatly impact how much money you’ll need to put down. You don’t need 20% down to buy a home, although most people think you do. Down payment requirements range from 0-5%, depending on the program. Selecting your loan carefully can help minimize your up-front costs.

Here’s what each loan option looks like, as well as the minimum down payment it comes with:

  • FHA loansFHA loans require a down payment as low as 3.5%, and they’re open to buyers with not-so-perfect credit. Keep in mind that lower credit scores (below 580) require a bigger down payment.
  • VA loans – Designed for veterans and active military members, VA loans require no down payment. They also don’t require private mortgage insurance, and they limit how much a buyer can pay in closing costs. They can save home buyers thousands, if not more, compared to other loan options.
  • USDA loans – If you’re willing to buy a home in a rural area, you might be able to use a USDA loan, which is backed by the Department of Agriculture. Like VA mortgages, these loans require no down payment and can significantly reduce your up-front home buying costs.
  • Conventional loans – Though many conventional loan programs require at least 5% down, if you opt for a mortgage through Fannie Mae’s HomeReady program or Freddie Mac’s Home Possible, you can pay as little as 3% down. Conventional loans typically come with stricter credit standards than other mortgage programs.

Finally, you can also use gifts from family to pay for your down payment. Some loan programs may have limits on how much an outside party can contribute, so make sure you talk to your loan officer before counting on this strategy. You’ll also need to document the funds fully and get the donor to sign a gift letter. This states that the funds are, indeed, a gift—not a loan they are requiring you to pay back.

How to save for a house FAQ

Buying a home is a big, expensive decision, so naturally, you probably have a lot of questions—not to mention apprehension about how you’ll make it happen. Use this FAQ section to guide the way, and be sure to reach out if there’s anything we haven’t covered.

How can I save enough money for a house?

Saving up for a house requires 1) knowing how much you need to save, 2) determining when you need to save it by and 3) actively cutting back and working toward your savings goal over time.

Use a mortgage calculator to get a feel for what you can afford, set a timeline for when you want to purchase the house, and then set a manageable savings goal for every month. Consider automating your savings, using a budgeting app or cutting back to make saving easier. You can also get a side job to help boost your efforts.

What’s the fastest way to save for a house?

The fastest way to save for a house is to reduce your existing expenses as much as possible. Then, funnel those savings directly into your home buying fund.

This might mean bringing in a roommate to lower your household costs, selling your car and taking public transport, or living on half your income until you’re able to save up enough. You can also put windfalls toward your home buying goals—things like tax refunds and holiday bonuses.

How much do you need to put a deposit on a house?

There’s no such thing as a “deposit” on a home. You will need to cover a down payment, closing costs and have the cash reserves that your mortgage lender requires.

The total amount you’ll need depends on a number of factors, including the price of the home, the specific type of mortgage loan you’re getting and your credit. To get a feel for how much you’ll need to pay upfront for your home purchase, use this calculation:

[Home Price] x [Desired Down Payment Percentage] + [3% of the Home’s Price for Closing Costs] + [2 Months of Mortgage Payment, Including Principal, Interest, Taxes, Homeowner’s Insurance & HOA Dues]

Make sure to talk to your mortgage lender for a more accurate number.

How much should you save for a down payment on a house?

That depends on the price of the homes you’re considering and the mortgage loans you’re eligible for. If you’re a military member or veteran, for example, you’ll qualify for a no-down-payment VA loan. If you have lower credit, you might want to consider an FHA loan, which requires at least 3.5% down.

On a $200,000 home purchase, that’d be $7,000. Keep in mind you’ll also have closing costs and need cash reserves in addition to your down payment.

Can I buy a house with a $10,000 deposit?

It depends on the price of the house you’re looking at and the mortgage loan program you’re using. If you’re buying a $250,000 home and using a 5% down conventional loan, $10,000 wouldn’t be enough to cover your “deposit,” more commonly known as a down payment. If you’re using an FHA loan that requires just 3.5% down, then $10,000 would certainly cover your down payment. To get the most accurate depiction of what your down payment requirements could look like by loan program, use this down payment calculator or talk to a reputable loan officer about your specific situation.

How can I save for a house if I pay rent?

Your best bet is to reduce your living expenses by adding a roommate, using public transport or cutting back on luxury expenditures, like eating out or traveling. You may also consider getting a side gig. Jobs like driving for Uber, running errands for Favor or grocery shopping for Shipt are all good options.

These offer flexible hours and can give you extra income to put toward your home purchase.

You could also try to find a cheaper rental house or apartment.

How do I see if I’m ready to buy a home now?

The best way to check your home buying eligibility is to speak to a lender and get a pre-approval.

Click the link below to be matched with top lenders based on your home buying criteria.

Want to see if you're ready to buy a house? Start here. (Aug 20th, 2019)