How to Save Money for a New House
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For many people, owning their home is a dream that may take a long time to come true because they aren’t sure when they’ll have the money for a home purchase. After all, they’ll need a down payment and extra cash for closing costs, appraisal fees, home inspections, and other associated expenses. However, homeownership may be closer than you think. With a solid financial plan and a firm commitment to saving money, you could have the cash to buy a new home before you know it.
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Set your financial goals
The first step to buying a house is knowing how much you can afford. Not only will this help determine how much your monthly mortgage payment will be, but it also will determine how much you need for a down payment. Depending on your mortgage type, you could need between 3% and 20% of the home’s purchase price for a down payment.
You also will need funds to pay closing costs—those fees charged by your lender that is payable at the closing of the real estate transaction (when you sign all the final paperwork and get the keys to your home). Closing costs vary but typically equal between 3% and 6% of your total loan amount.
Homebuyers also need to be prepared to pay for such expenses as getting an appraisal of the home’s value, having the home inspected by a qualified home inspector, and obtaining homeowners insurance. A home inspection objectively examines the house, structure, and the systems (HVAC, plumbing, electrical, sewage, etc.). The average cost of a home appraisal and inspection is between $300 and $500 each but could vary based on the home, location, and other factors. The average cost of homeowners insurance is $1,765 but varies on the house, location, and the type and amount of coverage you get.
Set a timeline
Knowing when you want to buy a home helps solidify how much money you need to save to meet your goal. For instance, to save $20,000 to buy a house in five years, you must save approximately $333 per month to reach that total. This provides a clear picture in the event you need to make adjustments. For instance, if you know $333 is not feasible for your budget, you may need to extend your deadline to six years, saving $277 monthly. However, once you set your timeline, stick with it. Otherwise, it might take you much longer to reach your goal.
Know the type of loan you want to get
There are several types of financial products to help you buy a home. The type of mortgage loan you get, from conventional to government-backed loans, will play a role in how much you need for a down payment, closing costs, and other expenses.
Conventional: The minimum down payment required for a traditional mortgage is 3% of the home price. If you pay less than 20% for your down payment, you likely will need to carry private mortgage insurance (PMI), which protects the lender if you default on the mortgage loan. PMI usually is 0.15% to 1.95% of the original loan amount.
FHA loans: Backed by the Federal Housing Administration (FHA), FHA loans require a down payment of 3.5% if you have a minimum credit score 580. If your credit score is between 500 and 579, you will need a down payment of 10%. FHA loans also require PMI, which, for these loans, ranges between 0.45% and 1.05% of the original loan amount.
VA loans: Backed by the U.S. Department of Veterans Affairs (VA), VA loans are for active and former military members. They don’t require a down payment or PMI.
USDA loans: Backed by the U.S. Department of Agriculture (USDA), these loans are for low-to-moderate-income borrowers and do not require a down payment. Some USDA loans may require PMI, but not all.
Although PMI may not need to be paid upfront—it’s often included in your monthly mortgage payment—paying for PMI even over the long term could make a home unaffordable for you. Therefore, it’s important to consider how much money you would need for a down payment without PMI versus how much you need for a down payment and PMI.
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Choose your savings tools
When you start saving, you need to know where to put your money to maximize your savings. If you want to purchase a home in less than 10 years, your money should be accessible yet still earn some interest. You can set up multiple accounts and have one as a down payment fund, closing costs fund, and additional expenses fund, or you can opt to have just one account for your entire homeowners' fund.
High-yield savings account: While you could put your money in a regular savings account, the national interest rate on these accounts per the Federal Deposit Insurance Corporation is just 0.05%. With a high-yield savings account, interest rates range from 0.50% to 0.75%, which could net you a few extra dollars. Most high-yield savings accounts limit how many withdrawals you can make each month or quarter without incurring fees, but this could be a good thing, so you aren’t tempted to use this money for something other than buying a house.
Money market account: Like a high-yield savings account, a money market account also earns higher interest than regular checking or savings accounts. Those rates currently hover around 0.50%, like a high-yield savings account. However, unlike a high-yield savings account, you can withdraw from a money market account using checks or an ATM card like a checking account. If you are tempted to use this cash for items other than buying a home, it might not be the right choice for you.
Ways to boost savings
There are several ways to increase your savings in your homeowners' fund so you can get that home as soon as possible.
Automatic transfers: Set up an automatic transfer from your checking account to your savings account to ensure you're putting money in your savings account. It can be once a week or monthly, whatever works for your budget. Start with an amount that isn’t a stretch on your finances, and, when possible, bump it up. For example, if you get a pay raise at work, you can increase your automatic transfer by that amount and keep living within your means on your old salary.
Side hustle: Find a second job to earn money that goes straight to your house fund. This could include everything from work at the local grocery store to mowing lawns to providing IT consulting.
Stash unexpected windfalls: Did you receive a tax refund? A bonus at work? An inheritance? Anytime you receive money that wasn’t expected, forgo the spur-of-the-moment weekend getaway or new TV and put that cash in your home savings account.
Cut unnecessary expenses: When we examine our spending habits with a magnifying glass, it’s easy to identify ways to cut costs. Put an end to streaming services you never or rarely watch. Skip the local coffee shop twice a week. Take your lunch to work once a week. These small sacrifices will build up your home savings account in a big way.
Reduce essential expenses: Find ways to spend less on your needed things. For instance, shop around for car insurance quotes to see if you can find cheaper rates. While grocery shopping, trade some brand-name items for the store brand. Review your cellphone bill to see ways to trim the cost. Put any money saved into your fund to buy a house.
Ask for cash: Tell them when family and friends want to know what you want for your birthday or a holiday gift. Let them know you are saving to buy a house, and they can help you reach your goal by giving you cash instead of a physical gift.
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Take advantage of homebuyer programs
Saving the money you need to buy a house can seem overwhelming. But you don’t have to do it alone. There are federal, state, and local programs to help you get the money you need to become a homeowner.
First-time homebuyer programs
If you’ve never owned a home, haven’t owned your own home in the last three years, or even owned a house with a former spouse during a previous marriage, you could benefit from first-time homebuyer programs. These programs often offer home loans with low mortgage rates and down payments to qualified homebuyers. Requirements typically include a minimum credit score, a maximum debt-to-income (DTI) ratio, and income limits.
Down payment assistance
Many state and local authorities and organizations offer down payment assistance to help homebuyers make down payments when purchasing a home. The type of assistance varies but can come in the form of a low-interest loan (serving as a second mortgage), a forgivable loan (which goes away after a specific period), or a grant (which doesn’t have to be repaid). Like first-time homebuyer programs, programs offering down payment assistance have strict requirements that must be met to qualify, including a minimum credit score and income limits.
More information on federal first-time homebuyer programs and down payment assistance is available from HUD. For state and local programs, click on your state and then “Learn About Homeownership.”
Review your credit history
When preparing to buy a home, it’s important to have your credit history in order. To do so, check your credit history with all three credit reporting agencies. You can do this for free by checking your reports with annualcreditreport.com. If you find errors on your credit reports, follow the credit reporting agency’s instructions for correcting mistakes.
Boost your credit score
If your credit score is lower than you’d like, start taking steps to raise it. The No. 1 way to increase a credit score is to pay your bills on time. Payments for credit cards, student loans, car payments, and other installment loans are reported to the credit reporting agencies every month, so when you miss payments, they are quickly recorded on your credit history. One late payment can reduce your credit score by 100 points, so making timely payments is important.
Related: Experian Boost™ Review – Give Your Credit Its Needed Boost
Pay off credit card debt
Paying off your credit cards can serve you in two ways. First, any money you were paying on your credit card debt can now go into your savings to buy a house. Second, paying off your credit cards reduces your debt utilization ratio, accounting for 30% of your credit score. Your debt utilization ratio is computed by adding up all your credit card balances and dividing that amount by the total sum of your credit card limits. So, if you have three cards, each with a $1,000 limit, and owe $750 across all three cards, your debt utilization ratio is 25%. The lower your debt utilization ratio, the better control you have over your finances. Experts recommend keeping your debt utilization ratio under 30%.
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The bottom line
Regardless of the reason, saving money can be hard. Reviewing your monthly savings account balance can reassure you that you are making a dent in your goal. Make a chart, put it where you can see it, and update it every month, reminding you of your progress every time you look at it. This will be a great motivational tool to keep you on track to get the money you need to become a homeowner.
Saving money to buy a house may seem like a far-off goal, but with proper planning and a commitment to fulfilling your savings goals, you could be a homeowner in no time.
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Writer
Karon Warren is a freelance writer who has covered articles in finance, insurance and health for sites like Reviews.com, USA Today, Healthgrades, among others.
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