Saving for a House and Other Financial Considerations
Moving into your own house can be exciting and frightening at the same time. Before transitioning from renting to owning a home, you’ll need to create a savings plan that not only includes your down payment (typically 5 to 20% of the home’s value) but also a reserve fund to cover unexpected emergencies.
Establishing an account for your yield savings can be a smart way to start saving for a house, particularly if you aim to make monthly payments manageable in the long term. Many buyer assistance programs also exist to help with closing costs and reduce the initial financial burden. In addition, you may explore assistance programs that offer further support.
Tips for saving for a house
If you find yourself daydreaming about a place to call your own, the first step is to set aside any money you can and take an evaluation of your financial health. Start with these tips on saving for your house:
Develop a budget and timeline.
Start by determining how much you’ll need for a down payment. Create a budget and calculate how much you can realistically save each month — that will help you gauge when you’ll be ready to transition from renter to homeowner. You may also want to check if an FHA loan amount, insured by the Federal Housing Administration, can suit your financial goals, especially if you need a lower down payment. Staying informed about regulatory changes through sources such as ABA Banking Journal or ABA Risk Compliance can offer valuable insights into mortgage rates.
Establish a separate savings account.
Set up a separate house savings account exclusively for your down payment and make your monthly payment automatic. By keeping this money separate, you’ll be less likely to tap into it when you’re tight on cash. Look for options with deposit insurance and a high-yield savings account to help your funds grow safely. Some banks require a minimum balance, so be sure to confirm account details to avoid unexpected fees. And if you feel you need to postpone your home purchase, buying time can help you grow your account savings further so you can meet your down payment goals with greater confidence.
Shop around to reduce major monthly expenses.
It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, internet and cell phone plan. There may be deals or promotions available that allow you to save hundreds of dollars by adjusting your contracts. By trimming these expenses, you’ll practice good risk management, making it easier to direct additional resources toward paying debt and building your down payment.
Monitor your spending.
With online banking, keeping an eye on your spending is easier than ever. Track where most of your discretionary income is going. Identify areas where you could cut back (e.g. nice meals out, vacations, etc.) and instead put that money into savings. If you keep close track of your expenses, you’ll be able to identify opportunities to reach your goal of homeownership faster. This approach can also help you avoid high debt income ratios that could hinder your mortgage credit score.
Celebrate savings milestones.
Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000 total, consider treating yourself to a nice meal every $5,000 saved. This will help you stay motivated throughout the process. Frequent recognition of progress can further motivate you to meet your savings goal. Whether you choose to deposit CDs or continue with your yield savings accounts, keep in mind that small victories can lead to substantial achievements over time.
Financial obligations and debt
Consider all of your current and expected financial obligations, such as your car payment and insurance, credit card debt and student loans. Make sure you can make all the payments in addition to the upfront costs of a new home. Aim to keep total mortgage payments plus utilities to less than 25 to 30% of your gross monthly income. Regulations limit the debt-to-income (DTI) ratio on most loans to 43%. Additionally, remember that certain types of loans may require private mortgage insurance or homeowners’ insurance to safeguard your property against unexpected events. Factoring in these costs, along with your monthly payments, will help you determine a realistic path to homeownership without jeopardizing your ability to handle other expenses.
Check your credit score
A high credit score indicates strong creditworthiness. Prospective homebuyers can expect to have their credit histories examined. A low credit score may keep you from qualifying for a low interest rate on your mortgage loan. If you find that you have a low credit score, you may want to delay moving into a new home and take steps to raise your score. If your score is lower than you’d like, investing in furthering your knowledge of financial information via online training programs can provide strategies for rebuilding credit. Strengthening your credit before applying for a mortgage can also reduce the need for costly mortgage insurance down the road.
Factor in all new home costs
Create a hypothetical and somewhat realistic budget for your new home so you don’t find yourself financially stressed after moving into your new house. Find the average cost of utilities in your area and factor in the following that may apply:
- Gas.
- Electricity.
- Water
- Cable or internet.
- Trash pickup.
- Yard maintenance.
- Real estate taxes.
- Mortgage and homeowner’s insurance.
- Potential homeowner association fees.
You might also explore different payment assistance programs offered through the housing administration or federal housing administration if you anticipate needing extra support. Tracking property taxes in your prospective area is equally important, as these can vary widely and impact your overall monthly budget.
Reserve savings after your house purchase
From a lending standpoint, there aren’t any requirements stating buyers must have cash reserves remaining after the purchase of a home. It’s possible to spend every penny of available cash on buying your home. However, it’s not a wise move.
It’s best to set up an emergency fund to deal with unexpected expenses. Your fund doesn’t need to have a lot of money, but certainly enough to deal with things like surprise house or car repairs which you can’t ignore.
Most people don’t have any significant savings and rely on credit cards to deal with these expenses. Kicking these costs down the road with added interest can often lead to larger financial problems later on. But having extra funds set aside in a yield savings account can provide a cushion for repairs or surprise bills. These reserves are a vital part of sound wealth management and ensure you won’t have to rely solely on credit cards or loans to handle financial emergencies.
Make saving a lifelong habit
Make a resolution to set aside some percentage of your income each month to build up your home down payment, create an emergency fund and give you peace of mind saving for your future.
If you set aside 10% of each paycheck, it’s likely that you won’t miss the money, and your savings will grow faster than you think. Over time, consistent saving is one of the most effective ways to save money, allowing you to build financial resilience and opening up broader career workforce development opportunities, as you won’t be bogged down by unmanaged debt.
You can also explore combining your new savings account with a checking account to streamline your finances, ensuring that monthly deposits and transfers occur with ease. Stop by your local Bank Midwest branch or apply for an account online.
Post updated. Originally published February 2018.
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