Buying your own house isn’t just about having a place to call your own. The equity that you build as you pay down your mortgage is an essential component of your financial security in the future.
When you’re ready to save up for a home, here are nine steps that financial professionals recommend making.
1. Decide how much house you can afford
There’s more to think about than how many bedrooms, bathrooms and square feet you need. You’ll want to keep on top of mortgage and refinance rates, which frequently fluctuate. You’ll also want to determine what you can really pay every month for this significant purchase.
“The general rule of thumb is that your monthly mortgage payment should not exceed 25-28 percent [of] your annual income, divided by 12,” says Jeff Rose, a certified financial planner and founder of Good Financial Cents. “So, for example, if you make $60,000, your monthly mortgage payment should not exceed $1,250.”
2. Don’t focus just on house price
Don’t simply factor the home’s price in your monthly mortgage calculations. You may also need to pay for mortgage insurance, homeowners insurance, property taxes, and homeowner association fees.
Utility costs can also make up a significant portion of your monthly budget. These can include electricity, gas, water, trash pickup, cable TV and internet service. If you’re considering buying an older home, keep in mind it might not be insulated as well as newer homes, which results in higher heating and cooling bills.
3. Research what kind of loan makes sense for you
Conventional mortgage loans are for homebuyers with strong credit and who can make a down payment of at least 3 percent of the price of the home. You’ll likely be required by your lender to pay private mortgage insurance (PMI) if you put down an amount less than 5 percent.
Borrowers who prefer the stability of a consistent rate may choose a fixed-rate loan, for which the monthly payment remains the same. Those who wish to have a lower payment if rates fall may choose an adjustable rate mortgage (ARM), which fluctuates along with market conditions.
Home ownership can be made affordable by loans backed by government agencies like the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA). These typically require a lower down payment than a conventional loan and offer more relaxed credit requirements.
The downsides to government-backed loans can include relatively high borrowing costs and two types of required mortgage insurance. Some sellers prefer a buyer with a traditional loan since government-backed loans may require that the house meet certain criteria to pass appraisal.
4. Manage your debt
Depending on your situation, it may be more important to pay off debt than save for a down payment on a house. By eliminating some debt, you’ll have more room in your budget for monthly mortgage payments later on. Plus, paying down debts could improve your credit score and ultimately help you get a better rate on your mortgage.
Too often, not having the credit score you need to secure a low rate is one of the biggest mistakes rookie homebuyers make, financial planner Rose says.
“The better your credit score, the better the terms you’ll be offered on a mortgage,” he says. “The better the terms, the less you’ll pay in interest over the life of the loan. This can mean a difference of tens of thousands of dollars.”
Improving your score may take patience, but it’s worth pursuing.
“Bringing up a poor credit score takes time, but financially, most people will come out ahead by renting for a while longer before buying,” Rose says.
5. Find ways to save
It’s time to consider cutting expenses if you find it’s a struggle to save for a down payment on a house or to meet that future mortgage payment every month.
Ahmed Ali, an outreach consultant at the home management technology company Centriq, suggests reducing expenses by 10 percent to start, if possible.
“This simply means that if your grocery budget comes to $500 a month, try to reduce it by $50,” Ali says. “It is not a huge difference to begin with, but little drops of water make the mighty ocean.”
6. Consider putting retirement savings on hold
You may want to consider pausing contributions to your retirement savings if you’re on the younger side and saving up for a home is proving to be a challenge. It’s not ideal, but those funds can be redirected into a variety of other savings methods, including a traditional savings account, a money market account or a certificate of deposit (CD).
While this approach can be helpful in saving for a down payment on a house, it’s not a long-term strategy. It’s something that should only be used for a short period.
7. Look for ways to earn more money
If you’ve lowered your debts and cut spending, but you’re still falling short of your goal, it may be time to think about earning extra money. If a second job isn’t practical, Shawn Breyer of Atlanta House Buyers suggests getting a roommate.
“Let’s assume your rent is $1,500 per month, and you decide to get a roommate to cut your housing bills in half,” Breyer says. “You are also cutting your utilities in half. Let’s assume utilities are $150 per month, and you are saving $75. Your total monthly savings by getting a roommate are $750 plus $75, or $825.”
Denise Supplee, a co-founder of SparkRental.com, says that she took this route when she was younger and it proved helpful.
“When I was a young single mom, I rented a room out,” Supplee says. “I even got child care in the deal. I was able to save on the rent and the utilities each month. Make sure, however, if you go this route, that it is permitted by the owners of the home.”
8. Make saving a habit
Pay yourself first each check by setting aside money toward your down payment goal, by setting up automatic transfers from your checking to your savings account every payday. This strategy helps ensure you won’t make impulse purchases you’d regret in the long run.
Some banks or mobile banking apps allow you to round up debit card purchases to the nearest dollar, and the difference is transferred automatically to your savings account. These round up programs can be another convenient way to watch your savings account grow.
9. Continue to save
Continue to funnel money to savings even after you’ve saved enough for a down payment on a home. Don’t forget also to set aside funds for expenses like closing costs, a moving truck and furnishings.
Continuing to put money in savings will also help ensure you have the funds to cover the ongoing costs of home ownership, such as maintenance and repairs.