Home ownership does not have to be a lofty aspiration forever out of your reach, and despite any current evidence to the contrary, you don't simply have to accept life as an eternal tenant.
The fact is, whatever your current financial situation, you can figure out how to save money to buy a house of your own.
Certainly it isn't always easy to set money aside to buy a house, especially when your current expenses already stretch your budget to the max. But take heart, there are ways to do it.
Many people in similar situations to yours, and even ones far worse, have managed to set aside money to make that long-awaited dream of home ownership a reality, and so can you.
Just follow these 7 simple steps:
- Determine how much you need to save
- Figure out your time frame
- Identify your best savings vehicles
- Clear space in your budget
- Automate your savings
- Save sudden windfalls
- Stay flexible
1. Determine how much you need to save.
The best savings plans are targeted to a specific goal.
By knowing exactly how much you want to save, you can more effectively set up a systematic approach to meeting that objective.
Research Home Prices
Therefore, you'll want to start looking at homes in the area where you want to live in order to get an idea of how much you'll need to save to buy one. Look at the asking prices of the types of homes you'd be interested in buying.
You don't need a realtor to do this either; you can start by simply searching websites like Zillow, Realtor.com or or Trulia to get an initial idea of current prevailing prices.
Remember, too, as you begin your search, the old real estate adage that the three most important qualities in a home are location, location and location.
As it applies here, this means prices in one location can differ greatly from prices for the same exact home in another location.
Calculate the Downpayment
Typically, the bigger the downpayment you can make on the purchase of a home, the more money you can save overall on that purchase.
The amount of your purchase price on the home that you'll have to borrow in a mortgage will be far less and the smaller your monthly payments and lower your interest rate and fees are likely to be.
Therefore, once you've identified some home prices in your range, calculate what a 10%, 15%, 20% downpayment on that price would amount to.
Examine your mortgage options based on your current credit situation to see what kind of a mortgage you could qualify for with each of those downpayment percentages.
You may find, in doing this, that you must make a downpayment of a particular percentage in order to qualify for home loan terms that you can afford.
Generally speaking, you should plan to make a downpayment of between 10% and 20% in order to get the best rates and terms on a mortgage.
A simple mortgage calculator can get you started crunching these numbers.
For finer and more accurate figures, you can always speak with a financial expert at your local credit union, who can give you a clearer picture of your mortgage qualifications and, consequently, what size of downpayment you would need to make in order to get a mortgage you can afford.
With information at hand, you can also set a price range for the homes you're considering, so you can hone your searches to houses you know you can probably afford.
Consider Monthly Payment Amounts
Another factor you'll need to consider in calculating how much you'll need to save to buy the home you want is the monthly payment amount you can both qualify for and afford.
The general rule of thumb in real estate is that you should plan to spend no more than 25% of your take-home pay on a monthly mortgage payment.
Your credit score, the purchase price of the home and current market conditions can all influence this amount. You can further influence this amount greatly under any conditions by adjusting the the term of the loan itself, or how long you have to pay it off.
The typical home loan is 30 years, but you can take out a mortgage for a shorter term, such as 15 years, and save tens of thousands of dollars over the life of the loan.
Your monthly payments on a shorter-term loan will likely be larger (all else being equal) and your required downpayment and available interest rate may also differ.
Consider Special Loan Options
Other ways to potentially save money on the cost of a home and, therefore, reduce how much you'll have to save to buy a home, include looking into government loans, such as through the Veterans Administration (VA) or Federal Housing Administration (FHA).
Not everyone can qualify for these types of loans, and, even for those who do qualify, these loans often have terms some borrowers may not find amenable.
For Example: To qualify for a government or special-needs home loan you may need to be a veteran or active military, low-income, a first-time homebuyer or meet a certain minimum credit score. Further, the home in question may also need to adhere to "minimum property requirements."
As for loan terms, government loans and other special-needs or special-circumstance home loans may come with higher interest rates, include private mortgage insurance and/or require a higher downpayment.
Here are some of the basic qualifications and terms for each of those two main types of government loans.
- You must be a veteran or active-duty military.
- The home can't cost more than $484,350 (in 2019.)
- There's no downpayment or PMI required.
- Minimum property standards, however, are required.
- To qualify, you must have a credit score of at least 500 and a debt-to-income ratio of less than 43%.
- Only a small downpayment of the purchase price is required: 10% if your credit score is between 500 and 579; 3.5% if it's 580 or above.
- PMI, however, is required, including an upfront payment.
- Interest rates are generally higher than those for conventional loans.
- Maximum loan amounts apply, though they vary by area.
In the cases of both loans, other qualifications and terms apply, so be sure to discuss them fully with your financial advisor before committing to either of these options.
That said, if you do qualify for a government or other special loan and you can handle all the terms and conditions they require, you may be able to buy a home with a much smaller savings than you would otherwise.
Take you time examining all the different options available to you to determine the most practical and affordable approach to buying a home.
The more you do, the better you can target your savings goals to more effectively help your achieve that larger goal of buying a home and, once you've bought it, keeping it.
Estimate Closing Costs
Lastly, plug the other costs of buying a home besides your downpayment into your calculations of how much you'll need to save, such as closing costs. These include (though are not limited to):
- Home inspection
- Property taxes
- Homeowners insurance
Plan for closing costs to add between 2% and 5% of the purchase price to the total cost of buying the home.
PMI (Private Mortgage Insurance)
There may also be ongoing fees to consider, like PMI (private mortgage insurance,) which some lenders might require you to pay for part of your loan term, based on your creditworthiness and other loan qualifications.
If you're required to pay PMI, ordinarily due to paying a small downpayment or having a low credit score, it can add 0.3% to 1.2% to the total cost of the loan.
The last thing you want on the day of your closing is to find that you have more to pay than you've come prepared for.
Once you know how much the home you want will cost you, you can determine how much, exactly, you need to save based on your current savings.
2. Figure out your time frame.
Next, you need to figure out how much you can afford to set aside each month in your budget toward that goal. This will help you to establish a realistic time frame to initiate the process of purchasing a home.
Simply divide the total amount you need to save (from Step 1) by the amount you can afford to commit to saving every month in order to determine how many months it will take to meet your goal.
Alternatively, you may know exactly when you want (or need) to move, in which case, your savings plan will have to conform to these limitations.
For this scenario, you'll divide the amount you need to save by the amount of time you have to save it in order to determine how much you need to save each month.
3. Identify your best savings vehicles.
There are many different ways to save money, with varying levels of risk and return. The lowest-risk savings vehicle, for example, may be a simple savings account, like a money-market account, but it is also likely to offer the least competitive rate of return of any savings vehicle (beyond stowing it under your mattress.)
Investing in the stock market, by the reverse token, is arguably an effective way to make outsized returns in a short period of time, but can be extremely risky and, even, cause you to lose your entire savings.
Investing in tradable assets like equities also has onus of operating on an erratic and unpredictable time frame; for someone trying to accrue savings on a time schedule, it can, therefore, be counterproductive.
Discuss your savings options with your trusted financial professional.
4. Clear space in your budget.
Realize that you may have to make some adjustments to your current budget in order to allow for these incremental savings toward a larger goal.
Are there subscription services you can do without?
Can you find ways to cut down on how much you pay for car insurance or other types of insurance?
Can you temporarily sacrifice one meal out per month, one vacation per year or some other regular treat in order to divert those funds toward this short-term savings goal?
It's true that you can't simply make more money out of thin air. You have to earn it somehow, either actively or passively.
Therefore, figure out what you can trim or take out of your budget in order to put that money toward your home savings.
5. Automate your savings.
If you're like most folks, once you have money in your hands, it can be hard not to spend it. Therefore, the best way to save money may well be to set it aside before it even makes it into your possession.
By automating withdrawals from your regular pay to deposit in savings, whether your employer or credit union can do it for you or you set up an automatic withdrawal from your account into savings right after you get paid every week, you can thwart your own self-sabotaging mechanisms and ensure your regular savings goals actually do get met.
Alternatively, you could opt to set up automatically monthly withdrawals from your checking account to put into home savings.
This might be a preferable option to weekly withdrawals if your budget and income are such that, some weeks, you're already stretching it to the limit.
6. Save sudden windfalls.
Periodic windfalls can occur, including:
- Tax refunds
- Big commission checks
- Capital gains
- The sale of a personal asset
When they do, rather than spend that extra money, bank it.
It won't impact your quality of life any, because you hadn't even counted on that income in your budget anyway, so why not just sock it away and forget all about it until you can use it to help you buy that home?
7. Stay flexible
Every plan is subject to circumstances, and, when they occur, the plan needs to adapt in order to remain effective.
So, build some flexibility into your plan. Allow for unexpected expenses that can come up at any time, like:
- A car repair
- A sudden medical expense
- Change in employment.
Of course the best way to keep any savings plan as flexible as can be is to set aside an emergency fund for yourself to cover those unexpected needs so you don't need to dip into your other savings that's intended strictly to fund the purchase of a home.
Summary and Resources
Home ownership does not need to be out of reach. You can set up a systematic, automatic savings plan that allows you to continue meeting present needs while paving the way for a new life as a homeowner in the not-too-distant future.
For years, 121 Financial Credit Union has been helping members in Jacksonville, Florida and throughout Northeast Florida strategize how to save the money to buy a house and effectively execute on that vision.
Whether you want to discuss savings accounts and investment options or explore home mortgage possibilities, one of our financial experts with local knowledge can help you access the resources you need to own a home. Contact us at 800.342.2352.