How to Start Saving to Buy a Home
Saving up to buy a home may seem impossible, but it’s not! It can be done, and it can be done sooner than you think. The most successful way to save for a home is to follow a savings plan.
Here are five steps you should take to start saving up for a home today.
#1: Determine What You Need
Ask yourself this: how much do you need to save to buy the house you want?
At a minimum, you will need to save enough to cover a down payment and closing costs. Down payments are calculated by a percentage of the loan amount. The percentage rates vary depending upon which type of loan you choose. For example, an FHA loan requires 3.5% minimum down payment, whereas a conventional loan requires a 5% minimum down payment (although 20% is recommended if you want to waive mortgage insurance fees). Closing costs can vary, but they typically range between 2% and 5% of the total purchase price.
Calculate the down payment percentage plus the closing cost percentage (we recommend 5% to be safe) of various home prices to help you determine how much you’ll need to save. Here’s an example of a down payment and closing cost calculation for a $200,000 FHA loan: $200,000 x .035 = $7,000 for the down payment, plus $200,000 x .05 = $10,000 for closing costs (highest estimate). Total, you should save at least $17,000.
Of course, a cheaper home and lower closing cost percentage will give you a lower minimum savings estimate. Determine how much home you can afford using this handy mortgage affordability calculator. Once you calculate a ballpark figure, you’ll know roughly how much you should work towards saving.
#2: Pay off your small debts
Before you can truly begin saving, you need to pay off your small debts— meaning your high interest credit cards. Throw as much money as you can at credit card payments each month and whittle them down until they’re gone. If you can, transfer all debt to the card with the lowest interest rate.
#3: Open a savings account.
If you haven’t done so already, open a savings account. Each month, determine your minimum monthly budget (cost of rent, bills, living expenses, etc.) and put the rest into savings. The idea behind a savings account is to make the money more difficult to access and spend like you would from a checking account. Pretend like the savings account doesn’t even exist, unless you’re putting money into it, of course. After all, savings accounts are for SAVING, and money should only come out of it for emergencies or to pay for something big, like a house.
Likewise, what type of crimes are in the surrounding area? Don’t just check the home’s neighborhood, also check the neighborhoods around it as well.
#4: Cut out unnecessary spending
Unnecessary spending happens in a variety of ways. Here are some examples:
- Subscriptions and memberships – Music and TV steaming services, meal delivery services, subscription boxes of goodies, memberships to organizations or clubs, etc.
- Dining out – Fast food trips, daily coffee shop runs, eating at restaurants more than once or twice a week… these costs add up quickly! Make your meals at home.
- Shopping – Do you really need that new watch or purse? Be sure to avoid impulse buys, too, like that candy bar at the check-out line or the $5-or-less section of Target.
- Cable and unlimited data plans – How many channels do you actually watch on TV? Chances are, you don’t need 500. Could you lower your data plan and use WiFi instead?
Remove all redundant spending and keep only what you absolutely need. Do this and your savings account will start to swell.
#5: Apply for down payment assistance
Yes, it’s actually a thing, and most of the time it doesn’t have to be paid back if you meet certain criteria.
HUD lists many down payment assistance programs on its site, but there are many (hundreds even) that aren’t listed. You just have to look a little harder. Try both terms when searching:
- Down Payment Assistance
- First Time Homebuyer
You’ll be surprised what you find. Much of what will come up, though, will just be small loans with high interest rates. You don’t want those. To weed them out, look for government-run websites.
Want to learn more?
To get more specifics about how much home you can afford to buy and how much money you should save before starting the home buying process, speak with one of our loan officers! We’ll be able to help you better plan for what to expect, as well as answer any other questions you may have about purchasing a home.
Chat with a Herring Bank mortgage expert to discover how we’re lending the way to your next home.
Request a call or call us at (866) 236-4779 to get started!
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