Given how much time we all spent at home over the last year, the word “home” has a much different meaning than it did just 12 months ago. A home used to just be the place where you lived.
Now, our homes are offices, schools, and much, much more, which is leading many people to reconsider what they need from their home. And if you’re one of the people thinking about buying their first house or upgrading their current house for a new one, you may have a whole lot of questions, including where to start. Well, we’re here to help.
There are a lot of things to think about when considering buying a house in today’s market, including what kind of house you want and where you want to live, but one of the most important parts of the homebuying equation is the financial piece.
It’s important to both be ready and able to afford a mortgage payment and have money saved up for closing costs as well as a down payment if you want to buy a house. So, let’s take a look at how to start saving for a house.
What kind of house can you afford?
Before we discuss how much money you’ll need to have saved up to buy a house, it’s important to understand how much home you can afford based on your income and monthly debt, otherwise known as your debt-to-income ratio.
The easiest way to think about it is this: your monthly mortgage payment, which includes your principal, interest, taxes, and insurance, should not exceed 28% of your monthly income before taxes.
You can find out what kind of house you can afford by analyzing your income and monthly debt to determine how much you can spend on a house.
But that’s the mortgage payment piece of the equation. What about the down payment?
How much money should you have saved up for a house?
When thinking about the best way to save for a house, a good place to start is the down payment. While saving for a down payment can be challenging, you may not be required to save up as much as you think.
Conventional wisdom is that you need to have a 20% down payment to be able to buy a home, but that’s not true. While lenders prefer buyers to put down 20% of home’s purchase price up front, there are plenty of mortgage options that require a much smaller down payment, including:
- Conventional loans: Borrowers with good credit may be able to get a Conventional loan with as little as 3% down.
- FHA loans: Loans backed by the government through the Federal Housing Administration. Borrowers using an FHA loan can put down as little as 3.5% of the home’s purchase price as a down payment.
One thing to note about both conventional and FHA loans: you may be required to pay mortgage insurance on either of these loans. On conventional loans, you will be required to pay mortgage insurance if you put down less than 20%.
FHA loans, on the other hand, require an upfront mortgage insurance payment and monthly mortgage insurance payments no matter how much you put down.
There are other government loan programs in which the borrower is not required to provide a down payment at all, including VA loans, which are guaranteed by the Department of Veterans Affairs, and USDA loans, which are backed by the Department of Agriculture. Neither of those loan programs require a down payment, but eligibility is limited.
Now that we have an idea about how much house we can afford and how much down payment we may need, let’s talk about how to save the money you’re going to need to buy that house.
How much of your savings should you use for a down payment?
When thinking about how much money you’ll need to save for a house, a good place to start is 20% of your monthly income. Obviously, that may not be feasible for everyone, but if you can save 20% of your income each month, you can put yourself in a good position to save up a down payment. Alternatively, if you can set aside 10% of your monthly income to save for a down payment, you can work your way toward having enough saved up to buy a house.
We acknowledge that neither of these options are particularly easy to accomplish. They require commitment and discipline on your part to stash that money away when you have other monthly expenses. However, if you can find a way to set that money aside, you will be well on your way to saving for a solid down payment.
How to save for a house
If you’re unsure how to save money each month, here are some tips for you:
- Create a budget: So many of us get caught in the fog of life without really sitting down to figure out how much we’re paying for all our expenses. Start by examining your monthly income and expenses. Make note of consistent expenses like your car payment and your utilities. Then, see if there are any expenses you can cut. Is there a streaming service you can do without? A gym membership you no longer use since you bought that exercise bike? A more cost-effective way to get your daily caffeine fix? Consider what you can cut and start putting that money away each month.
- Save that tax refund: Tax season is coming up. If you get a refund from the IRS, consider putting that money straight into savings rather than spending it. As we said, saving for a house requires discipline. Putting that hopefully sizable refund into savings rather than spending it won’t be as much fun as it would be to buy a shiny new thing, but you’ll be thankful in the long run.
- Ask for a raise: Are you appropriately compensated for your job? Think about it. You’ve been working hard this last year amid these unique circumstances, but are you getting paid like you should? Consider asking for a raise from your current employer. If you do get a raise, continue living off your old paycheck and put whatever extra money you receive into savings.
- Consider a new job: If your current job won’t pay you what you deserve, it may be time to look for a new one that does. If you are able to get a new job that pays more than what you’re getting now, again, live off your previous salary and save the additional money.
- Take a side gig: This new economy presents a myriad list of options for you to make extra money on top of what you’re making now. And many of those options may not even require you to leave your home. Consider your skills and how you may put them to use in a way that will earn you a little extra money. Are you skilled on social media? Maybe there’s a company that could use your help in your spare time. Or maybe you can tutor eager learners in a subject you know well. Maybe you’re an exceedingly organized person? If so, maybe you can work as an appointment setter or personal assistant. Don’t underestimate the number of opportunities for you to make more money.
- Ask for help: A good number of people use money from a relative or friend when saving for their down payment. Consider asking for money for your birthday or holidays. Then take that money and save it.
- Research down payment assistance programs: Depending on your financial situation, there may be some down payment assistance programs available in your community. Various nonprofit organizations offer grants, forgivable loans, and other means of down payment assistance. Do some research to see if you may qualify. If so, that money could help you buy a house.
What is the best account to save for a house?
Now that you’re saving money, what’s the best thing to do with it? Put that money to work for you! While investing in the stock market may seem like an enticing option, there is always a risk that your investment could take a negative turn. Be aware fully aware of all the risks and upsides before putting your money into the stock market.
Perhaps it’s better to consider something safer and more stable. If nothing else, try to get your money into a high-yield savings account where you will get some interest from a financial institution in exchange for keeping your money there.
You can also consider a certificate of deposit, an account that will pay an even higher interest rate. However, you may be required to keep your money in a CD for a specific period of time before withdrawing it. So, do your research and figure out what the best option is for you before committing to any investment vehicle.
Are there any other home buying expenses to save for?
Yes, there are. When buying a home, you should be prepared to pay closing costs when completing the purchase. Closing costs differ from state to state, but often include appraisal fees, title insurance, and other fees. Typically, closing costs are between 2% and 2.25% of the purchase price. These costs can be rolled into the loan on certain loan programs but you need to be prepared to pay some of them up front.
Buyers are also expected to have several months’ worth of mortgage payments on hand when buying a house. Lenders require buyers to have enough money in their accounts to pay several months of payments in the event of an income change or loss to protect against defaulting on the mortgage.
If you think you’re ready to learn more about buying a house, consider visiting our Mortgage Payment Calculator, which can help estimate your monthly mortgage payment. You can also check out our Affordability Calculator, which analyzes your income and monthly debt to determine how much you can spend on a house, and our current mortgage interest rates to see what interest rate you may be able to receive.
If you have questions about the mortgage process, contact a New American Funding Loan Officer. They will be happy to help you along the way.