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Home Buying 101: How to Save Money for a House

By Team Tomorrow
Published August 9, 2021

Tasha Anderson and her spouse want to save money for a house. Their goal is to save 6%, the average down payment amount for a home in the US.

6% doesn’t sound like a lot, but when a home is valued at $500,000, 6% is $30,000. For most of us, that’s more than an entire year’s worth of rent–and that $30,000 doesn’t include closing costs, moving fees, insurance, and other costs associated with home ownership.

It may seem impossible to save money for a house, but it can be done. You don’t even have to completely disrupt your lifestyle to do it.

In this post, we will cover:

  • Why you should work with a lender long before buying
  • How to create a realistic home-buying budget
  • Savvy savings and investment strategies
  • Why you should cut down your debt
  • Side hustles and downsizing
  • Celebrating the small wins

Let’s get started:

Reviewing Your Finances and Options with a Lender

Mortgage lenders are banks, credit unions, or private individuals that lend you money so that you can buy property. Lenders can provide you with competent financial information and can answer any questions you may have about your financial situation. Even if you’ve just started saving, a lender can assess where you are and provide you with a roadmap to help you achieve your financial goals.

A lender must have as much information as possible to get you accurate advice, so gather every financial document you can think of, including:

  • Bank statements
  • Investment account statements
  • Savings account statements
  • Pay stubs
  • Tax records

Lenders then run a credit check to determine if you can be pre-approved for a loan. To get a pre-approval, your lender must review all these documents and has run a hard credit check to ensure that you have the funds for a down payment. A preapproval letter states how much the lender is willing to lend to you. In many cases, people discover they’re much closer to being able to buy a home than they realized.

Defining a Path Forward

Competent lenders won’t just hit you with a DENIED stamp. If you don’t get preapproved for a loan, lenders can show you how much you currently have, how much you need, and how to get there. The rest is up to you.

Creating a Realistic Home Buying Budget

Tasha and her spouse have to save $30,000 to cover the down payment. Let’s assume that they already have money saved for other home buying expenses.

If they want to start the home buying process in two years, they each need to save $650/mo:

$30,000 / 24 months = $1,250/mo, or approx. $650/mo each

That’s a lot to save, but it’s doable.

To create a budget, Tasha first has to know what her money is going. She needs to analyze your bank and credit card statements to figure out where she’s spending money and how much she’s spending. She must break it down to specifics, being as thorough as she can.

Tasha takes home $3,800/mo after taxes. Also, she and her spouse also split all their house bills equally:

 

 

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Determining Your Savings Path

Knowing what’s essential and what isn’t will help Tasha save $650. In Tasha’s case, she has multiple options. Dropping her vacation fund and cutting her restaurants, bars, and entertainment spending in half will net her $595, just below what she needs. She can save more by brewing coffee at home to make up the difference.

She can also cut her entertainment budget in half and put her retirement contribution into a house savings to net her exactly $650.

There are many other ways she can cut costs, like:

  • Selling her car if she doesn’t need it, and putting the extra money into the house account
  • Switching to a cheap cable or phone plan
  • Refinancing her student loans to get a lower rate
  • Brewing her own coffee at home instead of going to her local café
  • Planning a staycation instead of traveling somewhere
  • Buying cheaper groceries

And the list goes on and on. It all depends on what money she wants to move and where.

Create SMART Goals

If you’ve ever worked in a corporate environment or attended a coaching session, you’ve probably encountered SMART goals. While they’re often met with glazed eyes during your 9am meetings, SMART goals can be as effective in life as they are in the business world. SMART stands for:

  • Specific – Setting a clearly defined goal
  • Measurable – Creating tangible goals to measure your progress
  • Achievable – Your goal is attainable, not aspirational
  • Realistic – Your goal is reachable and relevant
  • Timely – There’s a clear timeframe in which your goal should be achieved

Tasha’s SMART goal is as follows:

  • Specific – Save money for a house; specifically $15,000 (her half of $30,000) in 2 years
  • Measurable – Save $650/mo for two years, or at least an average of $650/mo
  • Achievable – She has to rearrange her budget to save $650/mo and will do so by  _____
  • Realistic – Tasha’s not sacrificing too much that she can’t stick to it and give up
  • Timely – Her timeframe is two years

Creating an Account to Save Money for a House

If your savings plan involves taking whatever remains in your checking account at the end of the month and moving it into your savings account, you need a new strategy. Your end of month balance almost always varies. You’ll also likely end up spending more money than intended.

Open a separate account set up specifically for buying a home instead.

For extra credit, open the account at a different bank so that you’re not even tempted to make transfers online. Next, set up a monthly recurring transfer in the amount you want to save to be moved from your main checking account to your house account. If you don’t even see the money in your checking, you won’t be tempted to spend it.

Invest in Stocks, Bonds, and CDs

Make your money make money for you. Checking and savings accounts in most banks accrue sparse interest, usually well below the rate of inflation. In Tasha’s case, instead of waiting earnestly for her $650 to become $650.01 next month, she should consider putting her savings into stocks, bonds, or CDs.

 

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Cutting Down Your Debt

If you’re trying to save money for a house, taking the time to reduce your debt may seem counterintuitive. Here to two reasons it isn’t:

First, when a lender is considering you for a mortgage loan, they look at your debt-to-income ratio (DTI). Your DTI is all your monthly debt payments divided by your gross monthly income. Typically, the highest DTI ratio a borrower can have while still qualifying for a mortgage is 43%. Many lenders may require a lower DTI.

Tasha’s debts include:

  • Rent – $1,200
  • Car loan – $200 (the other $100 listed in her budget is for insurance)
  • Student loans – $150

If Tasha’s debts total $1,550 and her income before taxes is $5,000, then her DTI is $1,550/$5,000 = 31%. Tasha probably won’t have a problem qualifying for a loan based on her DTI. However, if Tasha also has credit card debt like 47% of Americans, it will adversely impact her DTI.

Credit card debt segues into the second reason why you should cut down your debt: interest rates.

The average American family has $6,270 in credit card debt. It doesn’t sound like much, but credit cards are famous for having huge interest rates. If you had the average credit card interest rate and only paid the minimum balance required every month, here’s what happens:

Average American family credit card debt: $6,270

Average credit card interest rate: 16.28%

Minimum payment: $126/mo

Length of time to fully pay off: 82 months

Total amount paid: $10,311

Total interest paid: $4,041

 

By paying the minimum, Tasha will spend nearly seven years paying off her credit card, and that’s only if she never uses it again. She will also spend $4,041 in interest, which is more than 6 months’ worth of the $650 she’s trying to save.

If Tasha put $650 towards paying down her credit card instead, she’d have the card paid off in 11 months and only pay $403 in interest. Calculate your credit card interest here.

Side Hustles and Downsizing

Tasha is lucky enough to have a few areas in her budget where she can comfortably downsize. If her income after taxes was only $2,800 and not $3,800, saving $650 becomes much more complex. Instead of reducing a few items in her budget, she’ll likely need to earn more money or downsize.

The gig economy makes earning extra cash easier than ever. Tasha can set aside a few hours a week to earn money driving for Uber or working for Door Dash, or a comparable company. She can also take up freelancing and make money as a graphic designer or web developer. If neither option interests her, but she has service industry experience, she can pick up a shift or two as a server or bartender and put all the extra income into her house savings account.

Tasha’s other option is to downsize. She can sell her car, she and her spouse can get a smaller place, get a roommate, or even move back home. There are plenty of ways to reduce your budget, even if they’re not all ideal.

Celebrate the Small Wins

Saving money to buy a house takes a long time, and it’s easy to get off track and lose sight of your goals. Prevent this from happening by setting up milestones along the way.

Celebrating the small wins can be just as important as celebrating the big ones. Achieving small milestones allows you to pat yourself on the back, reflect on where you’ve been and how far you’ve come. Don’t go overboard with your celebrations, but make them worth it.

For example, Tasha and her spouse can buy a bottle of champagne to celebrate the first month, they both save $650. They can have a special date night at the three-month mark, and throw a “halfway there” party when they hit a year.

Lastly, find ways to keep yourself motivated. Look at homes on Zillow or Redfin, attend an open house on occasion, or pick up a flier for a house in your price range. You may not afford it just yet, but you’re on your way!

Final Thoughts

Saving money for a home isn’t easy, but it’s doable. Make sure your wealth is protected as you continue to build it


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