Are you ready to kick renting to the curb and buy your own place? If so, you've probably thought about how to save money for a house. If you're stumped and a bit intimidated by the prices homes are going for these days, here are some things you can start doing today to save for a house.
How to Save Money for a House
There are quite a few ways you can start saving money to buy a home. But first, you've got to know how much to save.
Talk to a mortgage lender.
It may seem like jumping the gun to talk to a mortgage lender years before you actually buy a house, but they're the ones who'll be able to tell you a close estimate of how much you'll need to save. Your mortgage lender checks a few things to determine if you can buy a house:
- Your income
- Credit score
- Savings account
- Extra money
They'll also walk you through the interest rate you can expect to have and add up how much that will add to your monthly payments. Here's an example to help illustrate this.
Let's say you make $60,000 per year. Most lenders recommend not spending more than 25% of your income on your house. With an income of $60,000 per year, you wouldn't want to spend more than $1,250 on your house per month. That includes taxes, interest rate, and insurance on top of your mortgage payment.
With a monthly payment like that and an interest rate of 5%, as well as a 20% down payment, you'll be able to buy a house for around $195,000 with a 30-year mortgage.
That is assuming that you have little other debt and great credit. And it doesn't include closing costs, which is anywhere between 3-5% of the purchase price of the house.
If you are military, looking for a house in a rural area, or a first-time homebuyer, then you may have more loan options available to you than simply conventional loans. This is great news because each of these loans have ways for people with lower credit scores and savings to get a house. VA loans, for example, offer a plan that requires no money for a down payment.
Talk to your lender about your loan options and start saving.
Pay down debt.
Before you start saving, it's a good idea to pay down the debt you currently have. Although it may seem counterproductive to your saving for house goals, it can help you in two ways.
The first is free up money every month to go toward your house payment. Your mortgage lender will take your debt into consideration when approving you for a loan, so the less you have—the better.
The second is to increase your credit score. If you have a low credit score, you can expect a high-interest rate. But if you have a high credit score, the chances of you getting the best credit scores are high.
If you have a credit card, plan on paying it down each month. Continue to use it for necessities like groceries and gas, though, as it will help you build your credit. Just don't forget to pay it off at the end of the month.
Decide your timeframe.
If you need a house ASAP, then setting aside a few hundred dollars every month toward your real estate dream isn't going to cut it. Before you go saving money, make sure you know how much you actually need to have and how fast you need to have it.
Sneaky Ways to Set Aside Money
If you plan to spend $195,000 on a house with a 20% down payment, you'll need to set aside $39,000. But if you're like most people, saving money doesn't just come naturally to you. There are a couple of ways you can "trick" yourself into setting aside money, though.
The first is to set up a separate savings or checking account where a portion of your paycheck automatically gets deposited every month. While you may notice it at first, over time you may not even miss it.
Another way to set aside money is to set aside your tax refund every year. The IRS reported that the average American gets $2,400 for a tax refund every year. That can add up pretty quickly!
You can also start a side hustle or rent out a room or two in your apartment to make some extra money. Making extra money is probably the fastest way to get to your home ownership goals.
There are also a couple of money hacks you can use, such as:
- If you have a Roth IRA, are buying your first house, and are under the age 59, you can take out up to $10,000 to use toward the purchase of your house.
- Use an FHA loan and you can have someone gift you part of your down payment. Of course, there are rules about what gifting means and who can gift it to you, but that is an option.