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Your total monthly debt payment shouldn’t exceed $1,440 per month or 36% of your monthly income, which means you can afford up to $320 in other debt. If you pay more than $320 monthly to service your debt, you need to lower your mortgage payment estimate accordingly. The 28/36 rule is one approach to determining the maximum amount of debt a household should carry. Bank fees can eat away at your checking and savings accounts if you're not paying attention. To reduce or eliminate these, talk to a representative at the bank about finding an account that better suits your situation.
Develop a Savings Plan
Clearly, the lower your down payment, the less you have to save for a house. However, keep in mind that paying less upfront means you’ll end up with higher mortgage payments (or settling for a smaller loan amount, depending on your overall budget). So it’s important to consider whether you prefer to save more now, or spend more in the future.
Setting aside funds for a down payment on a home? Put that cash in an accessible savings account.
If you want to save for a house fast, you need to be debt-free and have an emergency fund of 3–6 months of expenses saved. With your income freed up from debt payments and an emergency fund to protect you from life’s unexpected surprises, you can save for a house much faster. Whether you’ve already started saving for a house or you’re starting to save for the first time, there are plenty of ways you can save money for a down payment. Start by creating a budget for your household and consider other ways to cut down on expenses or increase your income. Having some cash on hand is a necessity for those looking to buy a home, but how much money should you actually save before buying a house? In short, you should have enough saved to cover closing costs, moving expenses and the down payment.
How to save for a down payment
Getting down payment assistance can potentially reduce the amount of money you’ll need to save for your home purchase. There are many ways to purchase a home with little to no money down—ranging from 0% down loans to government and bank-sponsored assistance. Depending on where you’re buying, there could be funds available at the city, county, state, and federal levels. If you’re looking to accelerate your savings rate, it might be time to do a lifestyle overhaul.
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Compare some of the best savings accounts to find a good place to build your home fund. It depends on the price of the house you’re looking at and the mortgage loan program you’re using. If you’re buying a $250,000 home and using a 5% down conventional loan, $10,000 wouldn’t be enough to cover your “deposit,” more commonly known as a down payment. If you’re using an FHA loan that requires just 3.5% down, then $10,000 would certainly cover your down payment. To get the most accurate depiction of what your down payment requirements could look like by loan program, use this down payment calculator or talk to a reputable loan officer about your specific situation.
Save on rent
The 28/36 rule is commonly used by mortgage lenders to determine a borrower's eligibility for a loan based upon the borrower's income and financial obligations. Further, your total debt, including housing expenses, student loans, auto loans, medical debt, credit card payments and any other debt obligations, should not exceed 36% of your monthly income. If you’re aiming to save for a 20 percent down payment, it’s going to take a little longer than saving for a five percent one. Some investment providers are notorious for charging high fees that end up eating up all your gains with high annual fees. One of the most crucial things to do when trying to save money to buy a home is to set a savings target.
Explore options for first-time buyers
Alternatively, though, these loans are usually at a lower interest rate than commercial banks offer, and these loans won’t hit your credit report. The minimum FICO score, which is the credit score used by 90% of U.S. lenders, required to qualify for a home loan can vary depending on several factors. It's generally recommended that conventional loan borrowers should have a healthy credit score, one of at least 620. However, FHA loan borrowers may qualify with a lower minimum credit score, one around 500 or 580. Buyers with credit scores of 760 or greater typically qualify for better interest rates on their home loan.
Know what percentage you have to pay as a down payment
You are typically required to pay a set amount of money every month for a 12-month term. VA loans are available to eligible active duty or retired military service members, veterans, and surviving spouses. These loans are also offered by private lenders, and guaranteed by the VA. Eligible borrowers can purchase a primary home with no down payment required, though you will need to meet the individual lender’s credit score and income requirements. Generally, there is no maximum loan threshold and a DTI over 41% may be allowed in certain cases. VA loans may also qualify for reduced fees and lower interest rates than conventional loans.
Another strategy is to have money automatically deducted from your paycheck. Most employers will allow you to split your paycheck into separate accounts for direct deposit. Use this feature to make sure you are saving a certain amount of money every single paycheck. Send it directly to your down payment savings account so that you aren’t tempted to withdraw money frequently from the funds earmarked for your down payment fund.
You can also put windfalls toward your home buying goals—things like tax refunds and holiday bonuses. Once you know how much you’ll need to save up, you’ll need to start thinking about your home buying timeline. Take the total amount of up-front costs you’ll have to cover (say $30,000) and divide that by 24 months. Some are offered by the municipal or state government, while others are offered through programs like NACA and individual banks. There are many first-time homebuyer programs that offer down payment assistance, lower interest rates, or other utility benefits. It’s best to research all the details, however, as some have residency requirements, tax implications, and other restrictions that may—or may not—work for your life plans.
"It's crucial to know your income, expenses, and where your money goes," suggests Brandon Norwood, licensed financial planner and owner of Oak City Financial. For those homeowners-to-be planning further out into the future, you may consider taking on slightly more risk by investing that money in the market to potentially earn a higher return. If you know home ownership is one of your goals, talk to a trusted financial planner well ahead of time, or just stick to a savings account to keep things simple. Knowing your timeline for buying a house will help you determine where you should be putting your money to save for a future down payment. If it's in the short-term (four years or less), keep that money in an FDIC-insured savings account that earns above-average interest and lets you access it should you need to.
See if you can find simple ways to save money and boost your savings. Now that you have a good idea of how much you need for a deposit, put a savings plan in place. If you are buying a house with someone else, make a savings plan together. For short-term goals, it’s best to put your money in high-yield, low-risk investments, since you’ll be more protected against the market’s fluctuations. Bonds tend to be less risky than stocks and can really help optimize short-term returns. Not only does this make the process automatic, but it also makes it invisible.
Once you know how much money you need to buy a home, it’s time to start saving. Whether you’re just starting to save or you already have some cash in the bank, you can use these strategies to start saving for your future down payment. By depositing these funds into your down payment savings account, you fast-forward the process of saving money to buy your future home. Regularly depositing a few thousand dollars per year in windfalls can chop a couple of years off of your savings timeframe.
You don’t want to keep the money you’re saving for a down payment in your checking account. Depending on your timeline and how quickly you’ll want access to funds, you’ll either want to put your money in a savings account with high returns or in a low-risk investment portfolio. You don’t want to be dip into the money reserved for your down payment the minute any sort of financial emergency arises. If you are saving for a short amount of time these can be the best place to put your money.
While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Now that you know when you’re buying and how much you need to save each month to get there, it’s time to actually start saving. There are many routes you can take to save up, from cutting corners and luxury spending to reducing overall living expenses and penny-pinching at every turn. Some people can leverage tax-advantaged retirement accounts, like the 401(k), TSP, and IRA, that can be tapped for home loans or personal loans (for a down payment). "Certain workplace retirement plans, such as 401(k)s, offer options like penalty-free withdrawals for first-time homebuyers or loans that can be used towards buying a house,” Norwood says.
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