Homeownership often seems like an unattainable goal. With price tags usually starting in the six figures, you’re forgiven for thinking that it takes a lifetime to save up enough cash for your first home.
But becoming a homeowner on a tight budget isn’t as far-fetched as you might think. With a bit of careful planning, you can save up enough money for a down payment on a house in just a few years.
Keep reading for a step-by-step guide to saving up to buy a house.
Planning on taking the next step
Before diving headfirst into the real estate market, you need a plan. Think ahead and consider every detail that might impact your savings.
How to save money to buy a house
Follow the steps below to make sure you’re prepared for what could be the biggest purchase of your life.
- Make a budget.
The first step in any financial endeavor is to make a solid budget.
What kind of expenses are you anticipating over the next few years? How about income? What other projects do you have? How’s your credit score?
Answering these questions honestly will improve your chances of developing a successful savings plan and sticking to it.
Next, do some research into the housing market you’re considering to see home prices. Contact your bank or credit union to ask about the mortgage interest rates they offer.
Once you’ve gathered enough information, start doing the math to figure out what down payment you want to make, what your monthly mortgage payments might be, and how long your mortgage term will last.
While a 20% down payment will save you money on private mortgage insurance (PMI) and interest, many banks now offer conventional mortgage loans with down payments as low as 3%. That means you can purchase a home sooner than you might have thought.
You might also be eligible for an FHA loan, which allows down payments starting at 3.5%, or a VA or USDA loan, which sometimes require no down payment at all. These are all solid options, but remember to calculate how much more your mortgage will cost if you make a smaller down payment.
And don’t forget all of the additional costs that come with buying a house, like realtor fees, appraisal fees, home inspection fees, closing costs, property taxes, and moving expenses.
- Reduce extra spending.
Once you’ve drawn up a comprehensive budget plan, it’s time to start saving money. You can begin by cutting unnecessary spending.
First, try to cut bad financial habits like impulse buying or overspending on restaurants and entertainment. It may not seem like much, but these habits make a hole in your savings over time.
You can also cut costs by bundling or reducing your cable and internet services or changing your cell phone plan. Consider canceling any subscriptions you don’t use regularly, and avoid making purchases you don’t need.
You could refinance your student or auto loan to reduce your monthly payments or switch insurance companies to get a better deal. If you want to save even more, you can try downsizing by moving into an apartment that’s smaller or in a more affordable area.
- Increase your monthly income.
Next, you want to increase the amount entering your accounts.
One way to do this is to take on a second job. See if you have some time in your schedule to fit in a side hustle like online freelance work, delivery, or rideshare driving.
If you already have a full-time job, you can ask for overtime or earn a raise by learning new skills or participating in extra training.
- Open a high-yield savings account.
Now that you’ve reduced your spending and increased your income, it’s time to make your savings grow on their own.
While it might be tempting to play the stock market for a quick return on investment, it isn’t worth the risk of losing your short-term savings.
Instead, keep the money for your down payment in a high-yield savings account, a money market account, or certificates of deposit. That way, you’ll have access to your funds when you need them, and they’ll grow in the meantime.
- Set up automatic payments.
This step will help make your savings process hassle-free while also preventing you from slipping back into old spending habits.
Contact your bank to authorize an automatic withdrawal from your primary account into the high-yield savings account you set up in the previous step. Your savings will start growing automatically.
- Pay off your debt.
This might feel like a step backward, but it’s essential to pay off all of your outstanding debts before taking on a mortgage. Using the saving practices described above, you can start making regular payments on credit cards, student loans, car loans, or any other loans and lines of credit you may have accumulated over the years.
In addition to saving money on interest payments, you’ll also reduce your credit utilization ratio and improve your credit score, which will help you get approved for a better mortgage.
- Press pause on your retirement savings.
If you contribute a percentage of your income to a retirement plan, like a 401(k) or IRA, you can temporarily shift those contributions toward your down payment savings.
This should only be a temporary practice to boost your savings before buying a house. Once you’ve moved in, don’t forget to go back to your retirement savings plan.
- Track your monthly progress and stay motivated.
Now that you’ve set up a solid savings plan, it’s time to watch your money grow. Keep track of your account and celebrate significant milestones. You can even place a picture of your dream home on your refrigerator and add markers to your calendar every time you get a step closer to your goal.
How to save money to buy a house while renting?
Many of us are renters before we become owners. If you’re trying to save up for a down payment while paying rent, you might feel like you’re facing extra challenges.
Here are some solutions for renters to help you save money.
Get a roommate
This is one of the easiest ways to save money as a renter. Having a roommate not only cuts your rent in half but also your utility bills.
Whether it’s your old phone, your second bicycle, or that guitar amp you never play, selling the things you don’t need anymore is a great way to raise money. Check local online market listings to get an idea of prices and awaken your inner salesperson.
You can also plan a garage sale with friends or family. Not only will you be making some extra cash, but you’ll also be clearing out the clutter to make moving day a breeze.
Consider a rent-to-own agreement.
Rent-to-own agreements allow you to rent your home with the option of buying it before the lease expires. That means you can move into a house right away while continuing to work on improving your credit score and saving for a down payment before trying to get a mortgage.
FAQs about saving for a house
Can I buy a house with no down payment?
Yes. Both USDA loans for rural residents and VA loans for military members and veterans require no down payment. Some private lenders also offer no-down-payment options.
How can I get help with a down payment?
State and local governments sometimes offer down payment assistance programs that provide grants or loans to help cover your down payment. Many of the loans are forgivable or have deferred repayment.
How much should I spend on a house?
The answer depends on your income, your mortgage agreement, and the amount of your down payment. But you should usually aim to spend no more than 25% of your monthly income on mortgage payments.
Is it better to pay off debt or save for a down payment?
In most cases, it’s much better to pay off any outstanding debts before committing to a mortgage. This ensures that you can dedicate more of your savings to your house payments and also improves your credit score.
The bottom line
Another great way of reducing your spending is to sign up for a cash-back payment card, like PointCard™.
A transparent, easy-to-use alternative payment card, PointCard allows you to spend your own money while also receiving exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.
You also get fraud protection with zero liability, no interest rates, and rental car and phone insurance.
Made to spend.