Purchasing a first home is a big financial step. The amount that you need when finding out how to save up for a house can seem daunting. Nonetheless, it’s not impossible.
Homeownership can be one of the cornerstones of building wealth. But to ensure that it’s a wealth-building tool and not a financial burden, you must be prepared. There are some financial obligations of your investment.
It not only means being able to afford your mortgage and other expenses of owning a house. It also means saving for a house down payment.
To learn how to start saving for a house, follow these steps!
How to save up for a house easily
There are a lot of factors that go into how to start saving for a house. These include how much house you want to buy, as well as the real estate market where you live. But something you can count on is the home’s purchase price being a large expense.
When asking, “how much money should I save before buying a house?” think about these things before talking to a mortgage lender.
1. Determine how much money should to save before buying a house
The first step for how to save for a house is knowing exactly how much you need to save. Your down payment amount will always be calculated as a percentage of the home price.
It also depends on your lender and the type of home loan you’ll be leveraging.
Types of loans
Special program loans such as USDA loans for rural residents, VA loans for veterans, and first-time buyer programs may require no down payment.
However, for conventional loans, you should expect to save at least 3% of the home price if your credit is pretty good. FHA loans require at least 3.5% typically.
How much to save up
You can estimate the amount you need by using your overall home budget or pre-approval amount instead of an actual home price.
For instance, if your home budget or pre-approval amount is $150,000, you should plan to save between $7,500 – $30,000 or 5%-20%.
Don’t forget that your expenses aren’t just a down payment, but also include closing costs (which are typically 3-5% of the loan price, though your individual situation may be different).
Plus other things that come up during the house buying process, which we’ll below in this article.
To answer your question, “how much money should I save before buying a house?”, try out this mortgage/house down payment calculator.
And based on what you are pre-approved for, ensure you can comfortably afford your monthly mortgage payments. The last thing you want is to wind up house poor.
2. Create a monthly savings goal towards your house down payment
Since most people don’t have an extra $30,000 laying around, it’s important to save up for your down payment over time. To do this, you need to create a monthly savings goal.
Your savings goal is the amount of money that you can realistically put into savings each month to go toward your down payment.
And since monthly payments are part of owning a house, this could be considered preparation for first-time home buyers.
Based on your current income and expenses, determine how much extra money you can put aside each month toward your down payment. This is your monthly savings goal.
3. Add saving for your house to your budget
In order to know exactly how much you can actually save each month, you need to create a budget. Your budget will help you identify how much extra cash flow you have at the end of each month. And also where you can reduce expenses to increase that amount.
Once you’ve identified your monthly savings goal, you need to add it to your budget. This means you will begin treating it as an expense—making sure that it gets paid every month.
Simply add it as another line item in your current budget and allocate funds toward it each month.
4. Determine your timeframe to purchase your first home
By now, you’ve already answered the question, “how much money should I save before buying a house?” Now it’s time to talk about how many years or months you have to save.
Timing is everything in the housing market especially given how quickly a seller’s market can change to a buyer’s market.
How to save up for a house quickly
So, the more aggressive that you can get with reducing your expenses and increasing your income, the less time it will take to save. To estimate time, simply divide your down payment target by your monthly savings goal.
If you’ve decided to learn how to save up for a house fast, find creative ways to reduce your expenses. You can also increase your income to add extra cash toward your savings.
Here are a few things that you can try:
If you find ways to consistently increase your cash flow, update your monthly savings goal and budget to reflect that new number.
How to save up for a house over a longer time period
If you think that home ownership is a goal that is several years away, you can save up more slowly. If you have quite a few financial goals or aren’t in a position to take on a mortgage yet, saving up for a few years could be a good option.
5. Open a separate savings account to save for your house down payment
Once you have your monthly savings goal and have created a line item in your budget, it’s time to start stashing your cash!
Since you’ll be saving a large sum of money, it’s ideal to save it in a place that will work to your advantage. You want to save your money in an account that will allow you to reach your goal faster by providing interest on your money.
Leverage money market accounts and high-yield savings accounts
Traditional savings or checking accounts don’t provide much interest, so they aren’t ideal for holding your funds.
The best options are ones that allow your money to work for you—while being easily accessible. Which is either a high-yield online savings account or a money market account.
You should probably avoid things like CDs and bonds if your timeline is very short because you may need to keep the money in the investment vehicle for a set time, otherwise you might face penalties.
In recent years, online banks have completely changed the landscape of banking. With their high-interest rates and low minimum balances & fees, online savings accounts are a great option for your down payment funds.
Likewise, money market accounts provide high-interest rates and accessibility; however, the minimum balance required to open an account can be relatively high.
Decide which option is right for you and open an account specifically for your down payment goal. You can even go as far as renaming the account “House Savings” for a little bit of motivation!
6. Automate your savings
To help ensure that you don’t lapse on your savings, automate your monthly transfers to your savings account.
Saving money doesn’t come naturally to most people, so use automation to ensure that you are making progress toward your goal and sticking to your plan for how to save up for a house.
You can do this by having your employer deposit a percentage of your paycheck to your savings account or having your bank automatically transfer funds from your checking account on a specific day of the month.
The less that you have to think about it, the easier saving for your down payment becomes.
7. Save some more
It’s important to note that your down payment isn’t the only money that you’ll have to bring to the table when purchasing a house. So while you’re saving for your down payment, be aware that you may also need to save for things like:
- Closing costs
- Inspections & appraisals
- Moving costs
- Furnishing, decor, and/or renovation costs
- Homeowners’ association fees
Though all of these may not apply to your situation, it’s good to have extra funds on hand for miscellaneous expenses that may come up.
You may consider reducing the amount that you put toward your down payment so that you can use the rest of the money to cover these and other expenses.
8. Improve your credit to save on mortgage interest
While not directly related to saving for a downpayment, improving your credit has a huge impact on what your mortgage will cost you. By improving your credit, you can qualify for the lowest interest rate possible.
It can save you tens of thousands of dollars on mortgage interest over the life of your loan. Since saving for a down payment takes time, you can also take advantage of the time you have to improve your credit.
Which would include:
- Pulling your credit score
- Paying down debt to reduce your debt-to-credit ratio
- Disputing any issues
- Avoid applying for new lines of credit as your home purchase timeline gets closer
Leverage these key tips on how to save up for a house!
Now you know how to start saving for a house! The great news is that the money that you save for a house down payment will be put toward your mortgage.
That means that the more that you save, the less your monthly mortgage payment will be. Consider this when you are establishing your savings goal.
Be consistent and stick to your plan for how to save up for a house. Before you know it, you’ll be financially prepared to buy your house!
Our free course on how to purchase your first home can also guide you through the process!