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How to save money to buy a house?

Do you need to save money to buy a house? Coming up with enough cash for a down payment and closing costs can be intimidating. The minimum down payment to buy a house ranges from 3% to 5% of the sale price, plus you’ll need another 2% to 5% for closing costs—ouch!

Given the upfront cash needed to buy a home, getting the keys to your own place might seem like a far off dream. But the truth is, there are many practical ways to save up for a home.

1. How much to save to buy a house?

Before you start saving to buy a house, you need to know how much to save – or at least a ballpark amount.

Coming up with an “exact” figure at this stage isn’t possible because down payments and closing costs depend on the purchase price. So until you sit down with a mortgage lender and get pre-approved, there’s no way to know (with any certainty) how much you’ll need to buy a house. 

But even without concrete numbers, an online calculator can provide a rough estimate of affordability. Basically, you’ll input your annual salary and then provide information about your monthly debts (car loans, credit card payments, student loans, etc.)

Based on this information, the calculator estimates how much you’re likely able to spend on a house, and from here you can estimate how much to set aside for your down payment and closing costs. 

Again, these figures AREN’T concrete, so the amount you’ll “actually” need could be more or less. At the very least, you’ll have a general idea of your upfront costs, so you’re not completely surprised.

2. What’s your timeframe for buying a house?

Once you have a general idea of how much to save for a house, decide when you’d like to buy.

Do you want to buy a house in 12 months, 24 months, 36 months, or longer? This is need-to-know information because a timeframe can determine the amount to set aside every month.

Let’s say you need $10,000 to buy a house and you’re thinking about purchasing in 24 months. In this scenario, you’ll need to set aside $416 a month to hit your goal.

3. Think of ways to cut expenses

Now that you know how much to save for a house, think of ways to cut expenses. Depending on your income, cutting expenses alone might not provide enough disposable cash to build a down payment fund within the desired timeframe. In which case, the other tips on this list will come in handy.

All the same, if you can reduce some expenses, the savings will add up each month. Ask yourself a few questions: 

• Is buying a new home worth living without cable? If so, cancel your service and save $100 or more each month. 
• Is buying a home worth eating less junk food? If so, aim to shave $25 off your weekly grocery budget to save another $100 per month. 
• Is buying a home worth eating out less? If you can save $25 a week by eating out less, that’s another $100 in your down payment fund. 

4. Get a second income stream

Getting another income stream—whether starting a business or getting a part-time job—can also give your down payment fund a boost. 

Even if a side business or a part-time job only brings in $200 to $300 a month, that’s $2,400 to $3,600 saved in one year. 

There are a few things to keep in mind, though. If you’re starting a business, you “might not” be able to include this income when qualifying for the mortgage. Typically, you need to be in business for about one to two years before mortgage lenders will use business income for qualifying purposes.

5. Sell items

There’s a good chance that some of your down payment is sitting in your bedroom, your living room, your garage, your closets, and so forth. 

Selling items can be tedious and time-consuming, but a sale can pay off handsomely. Therefore, if you have items collecting dust, throw a “for sale” sign on them and see what happens. Cleaning out your house might generate hundreds or thousands of dollars.

6. Save your tax refund

A tax refund can be the ticket to growing a down payment fund faster. Depending on the size of the refund, you might save a third of the cash each year.

7. “Temporarily” reduce retirement contributions

Another way to save money to buy a house is to temporarily reduce contributions into your retirement account. 

For this to work, though, you must funnel the extra money on your check to your down payment fund. Once you’ve purchased the home, you can resume normal contributions. If possible, increase your contributions by 1% or 2% to play catch-up.

8. Don’t take on new debt

New debt eats into your disposable cash, and as a result, there’s less money for building a down payment fund. Also, increasing your debt increases your debt-to-income ratio. This can potentially reduce your qualifying amount when applying for a mortgage. 

As a general rule of thumb, if you’re thinking about buying a house in the next few years, don’t accumulate credit card debt and don’t apply for loans (if possible).

Did you find this information helpful, or got a question about saving money to buy a house? Let us know ↓↓