Our nine tips on how to save enough money to buy a house — fast! Plus, overcome the three financial hurdles on the road to home ownership – maximizing your credit score, stashing away a down payment, and having a stable income.
Disclosure: Our editorial content contains affiliates from which we receive a small payment to support the site at no additional cost to you. These marketing partners do not influence our opinion of their products. They do not review, approve or endorse our editorial content. All opinions remain our own.
How to Save Enough Money to Buy a House
A house is the biggest purchase most people ever make in a lifetime. As such, it can be daunting to imagine how you’ll ever come up with the money to make it happen. The good news? Remember the old adage, “Yard by yard, life is hard. But inch by inch, life’s a cinch.” The best thing you can do is create a plan to save enough money to buy a house and work your plan.
Fortunately, you just need three things to buy a house – a good credit score, a big chunk of money (for your down payment and closing costs), and a stable source of income, and fortunately, too, they’re all more within your power than you might think.
First Things First… Even Before You Save Money to Buy a House
The first thing to do in preparation to buy a house is to check your FICO credit score. Reason? If there are mistakes or derogatory remarks (derogs) it can take some time to fix them. Make no mistake… there are things you can do to fix bad credit. But it doesn’t happen overnight. So you best bet is to look at this now – well in advance of when you need it. Put time on your side, because fixing bad credit (or establishing credit) takes some time, and is somewhat dependent on the actions of others as well as yourself.
Ideally, you’ll want a credit score of 740+ to buy a house. You may be able to sneak in with a 720. But the best interest rates and terms are reserved for those with above a 760 credit score. Be sure to read this info on fixing or building credit today, so you can address this while getting #2 and #3 in order.
Part 2: That Daunting Down Payment
One of the biggest challenges in saving enough money to buy a house is coming up with all the moolah you’ll need for a down payment and closing costs.
You see, banks are by nature risk averse. That’s why the more skin you have in the game, the more comfortable they are that you’ll repay the mortgage loan. Greater down payments offer them cushion against that risk. Lenders like to see you make a 20% down payment. On a $200,000 house that’s a cool $40,000 plus closing costs. But there are options for those who can’t pay that much.
Private Mortgage Insurance (PMI)
Should you not be able to pony up that much, you’ll pay a “penalty” called PMI, or private mortgage insurance. It’s not the end of the world to pay PMI, but your money certainly goes farther without it. Especially since PMI is only there to add a layer of protection to the lender. It doesn’t contribute to your equity (the paid-off amount of the property you own) one bit.
If you do pay PMI, once you have at least a 20% stake in the property, ask your lender in writing to remove it. Lenders are legally required to remove PMI when you have 22% equity in the property. In other words, when your loan value reaches 78% of the total home value.
Also, if your home has appreciated in value you can request your lender to drop PMI. This will usually need to be proven by an appraisal (an assertion of a home’s value, different from your tax assessment). Should they not remove it at the 80% point, consider refinancing your house. Just be sure your costs of refinancing won’t exceed the savings on your PMI.
Theoretically you can buy a home with 3½% down on FHA or 0% down with VA. But not always. Those involve extra costs to the seller. That means many sellers will just hold out for a conventional buyer. Lenders also like to see cash reserves of two to six months of your PITI (Principle-Interest-Taxes-Insurance) in the bank. Fortunately, retirement accounts generally count toward this requirement.
For more on how to save enough money to buy a house, especially your first house, keep reading…
It’s important to see this from the lender’s perspective. It’ll help you prepare. And keep you from going crazy with their information requests during the lending process. Lenders want to see stable, reliable, income from a legitimate source. Is the income consistent over time and is it rising? Is it from an authentic source or does it look sketchy? That’s why they demand things like tax returns, W2’s, and bank statements when you apply.
There are mortgage products available for the self-employed, but they’re trickier and generally more expensive (higher interest) to get. If you’re married, it can be easier to apply solely on the basis of the person with the standard paycheck and not bring the self-employment of the other person into the equation.
Finally, How to Save for That Pesky Down Payment
Remember, lenders are notoriously risk averse. One of the best ways to reverse their risk is to bring more money to the closing table. And be able to show consistently high income in relation to your expenses. But it’s not quite as easy as collecting $200 every time you go around the Monopoly board.
Here are our nine tried and true MyWalletWisdom tips to saving enough money to buy a house — especially gathering a sufficient down payment to expedite fulfilling your home ownership dreams:
1. Make buying your first home a top financial priority.
Only then will you do what you need to do for success. Your sacrifices are for a season, not forever.
2. Track every expense.
Money has a way of falling through the cracks when you don’t track it. Some people hate to keep records. But ask yourself: how important is this to you?
3. Cut out little expenses that don’t really matter to you.
How many things can you find that don’t matter quite enough to let them get into the way of your big audacious dream? It’s all about cutting back on the things you don’t really care about that much, in order to get what you do care about. What if you did that for one year? Could you find enough leverage in your budget to get your down payment money? Even half your down payment? Live below your means and you’ll achieve your bigger dreams.
4. Automate your savings.
Create one account that all your income automatically goes into. Then automate a monthly transfer to an account only for living expenses. Spend only out of that account. The rest stays in the savings account to grow towards your down payment and closing costs. Please don’t put this money in the stock market. You don’t know what might happen in the near term. Your goal is to get out of the rent trap and buy your home.
5. Pay down debt as fast as possible.
If you have credit card debt, an auto loan, or student loan, pay them off asap. They’ll count against you when you apply for a mortgage. Lenders consider your entire debt load compared to your income. The less debt you have, the better. Not to mention that home loans today generally come with a lower interest rate than credit card debt, or auto and school loans.
6. Investigate first time homebuyer assistance programs.
Check out national, state, and local first-time homebuyer assistance programs. See mistake #14 in our article on first-time homebuyer mistakes.
7. Earn more money.
Do this by getting an extra part-time job, creating a side hustle, expanding your job skills, asking for a raise, finding a better job…
8. Slash your expenses on the big things too.
This might be the time to do some radical expense trimming for a short time to meet your goals and dreams. See if you can trade rent for apartment maintenance or showing vacant apartments (or something else… think creatively). Drive a cheaper car to eliminate your car payment. Move closer to work to cut commuting expenses. Cut the cable. If you learn to live frugally now, you can reward yourself later with a lifestyle you actually can afford, instead of one that puts you in debt prison.
9. Celebrate incremental victories in a reasonable way.
Let’s say you’re trying to put away $45,000 — $40,000 for a down payment and $5,000 for closing costs. Every time you hit a milestone (say a $5,000 or $10,000 or $20,000 mark), enjoy a small celebration and then get back to the task at hand. But please don’t take on debt for your celebration. Focus on the big, audacious goal and don’t let anything derail you.
The Sacrifice in Saving Enough Money to Buy a Home Will Be Worth It
It won’t be easy to sock away this money, but once you buy your home and live there for a few years, you’ll reap the benefit of growing home equity and a stable payment (assuming a fixed rate loan) that pales compared to the rising rents your landlord can (and probably will) charge.
Even better, you can truly make your house a home, putting your own special touches on it, and live the lifestyle you most enjoy… while achieving financial independence for a lifetime. And that, my friend, makes your dream well worth pursuing, despite the temporary sacrifices.