If you are looking to start saving money to buy a house you’ll want to do a little research to determine what you can afford and exactly how much money you need. It is also important to have a good current financial picture so that you can create the savings plan that works best for you.
How much can you afford?
Ideally, your monthly mortgage payment should be no more than 25-30% of your monthly gross income. So if you earn $6000 per month, you are looking at $1800 or less per month for your mortgage payment.
There are many mortgage calculators online that you can use to determine what you can afford. Plug in different values until you find a number that works within your budget.
Here is a mortgage calculator that I like. It is fairly easy and gives a lot of details to help you plan.
Don’t forget to take a look at the market value of homes in the area that you are interested in so that you are well aware of the trends.
Home values can be found on realtor.com or zillow.
One tip….in some areas the housing markets are really hot. This means that many people are overbidding on homes (paying more than what they are listed for). Keep this in mind if you are loving homes at the higher end of your price range. Having more cash in savings will help you out.
How much money do you need to save to buy a house?
The bulk of your savings will be for the downpayment. The higher your downpayment is, the lower your monthly mortgage payment will be.
Typically the down payment is 20% or more of the purchase price. There are some programs that allow a lower downpayment but be careful. Paying less than 20% down will mean a higher monthly mortgage payment. There will also possibly be other costs such as private mortgage insurance if you pay less than 20% down.
In addition to your downpayment, there are other costs that are required at the closing of the home purchase. These costs can range anywhere from 2-4% of the purchase price depending on where you live.
Let’s assume you are looking at a home that is $500,000. Your downpayment at 20% would be $100,000 and your closing costs could be up to $20,000.
In this scenario, your monthly mortgage payment (depending on interest rate) is about $1650.
You will need $120,000 for the home purchase. You might want to save some extra as there are always moving costs incurred. I suggest a few thousand dollars so $125,000 would be a good number to shoot for in this scenario.
What is your current financial picture?
Before you create your savings plan, take a look at where you currently are. Gather all the data for the below categories.
Income – List your gross monthly income from all income sources. Be sure to include irregular income.
Expenses – List all of your current monthly expenses. Be sure to include irregular expenses.
Debt – List all of your debt. Credit cards, auto loans, student loans, etc. Ideally, you want no debt going into buying a home. It frees up your cash flow and it will help you qualify for your loan. If you have debt, consider making a plan to pay this off before saving money to buy a house.
Savings – List all the money you have in savings less any emergency funds. Don’t use your emergency funds for your downpayment. You still want to have that available for an “emergency”. If you do not have an emergency fund then consider building one up before saving money to buy a house.
Other money– If you have money that you plan to receive in the future, note that. Maybe a settlement, inheritance, gift, bonus, or something else is expected.
Create your plan for saving money to buy a house
At this point, you should have a good idea of what you can afford, how much you need to save and where your current financial situation. It is time to put it all together to create your plan.
I cannot stress enough to pay off your debts first and ensure that you have emergency savings. If you are really itching to buy a house then at the very least pay off your credit cards and limit your loans to one if you have multiple. It will really help your cash flow later if you do this.
Because I don’t know your exact situation, I am going to give three different scenarios with a sample plan for each. Pick the one that is closest to yours and adjust the numbers accordingly.
Scenario 1: You have consumer debt and no emergency savings
If this sounds like you, then I suggest starting with a plan to build up a small savings account of about $1,000 for immediate emergencies. After that, tackle paying down your debt and then build up emergency savings of 3-6 months of your expenses. And then….you can start saving money to buy a house.
This could take some time depending on your numbers but it will be much better long term. You will be in a stronger and more comfortable position when you are ready to purchase.
Another benefit with taking your time with this strategy is that your income can be potentially higher when you are ready to purchase which gives you more purchasing power and better cash flow.
To keep yourself focused and motivated keep your vision of owning a home in front of you at all times. It is also important to come up with a budget strategy Monitor your progress and congratulate yourself each month as you get closer.
Scenario 2: You have no consumer debt but not many emergency savings
In this scenario, you are one step ahead of the game. All you need to do is bump up that emergency savings and then you can start saving money to buy a house.
If you are already contributing to your savings, then carry on. Maybe check to see if there is any way you can contribute more. Create your budget and be sure to add savings as one of your budget categories.
Once you have your 3-6 month emergency fund then continue saving for that home. Keep the vision of your home in front of you so that you are sure to be diligent and mindful of your spending. It is easy to start spending money on unnecessary things. Save first if your value is buying a home.
Scenario 3: You have no debt and you have emergency savings
This is the sweet spot. Chances are if you are here then you are already pretty savvy with your budgets and your financing. However, saving $125,000 (as in the above example) might sound a bit intimidating.
If you are really motivated to get this house then go through your expenses in detail and knock off anything unnecessary. This is not suffering. This is choosing. See how much you can add to your savings each month by doing this.
Example:
Let’s say you take home $4800 of that $6000 monthly gross income and your expenses are $2000 per month. That leaves you with $2800 per month.
Assume that 15% ($420) of that $2800 is for unexpected items.
This leaves you with $2380 per month for savings if you are living fairly frugally. We’ll say $2300.
At this rate it will take 4.5 years to save the $125,000.
That sounds like a long time, right? Keep your home vision in front of you and and stay in the mindset that you will get this home. This opens you up to receiving any opportunities that come your way.
Below is a list of possible opportunities/strategies for speeding up the process:
- Any windfall of money put into your “savings for a home” account
- If you are under budget in any category for the month then put the extra money into this account.
- Are there any side hustles you can do to increase your income?
- Sell items you do not use anymore
- Trade in your car for a less expensive one (insurance may lower as well)
- Look for any discounts on your utilities
- Cancel or freeze memberships for a while and add the dues you would be paying to your “savings for a home” account.
It is possible to lessen the number of years it will take to save this money. Just be very diligent with your monthly budgets and be sure to put any surplus into your savings account.
You will find that you not only succeed at saving this money to buy a house but you also create money habits that will serve you well in your future.
Summary for saving money to buy a house
Try to make the process of saving to buy a house a positive experience. Unless you have a windfall of money, it will take some time. Be patient and diligent and remind yourself that this is the journey to your next phase in life.
A home is one of the largest purchases you will make. Be excited about it and enjoy the adventure of saving for it, finding it, and then stepping into it.
Here is a simple checklist that can help you create your plan.
Please feel free to comment or contact me with any questions.
Thanks for reading!
Stay balanced,
Jill