How to Save for a House: A Step-by-Step Guide

Buying a house is the largest purchase most people make, and saving enough money for a down payment can seem like a tremendous challenge. Careful planning, budgeting and saving are essential to buy a home. We'll take you through the process of how to save for a house, step by step.

• Determine areas where you can spend less and save more.
• Consider high-yield savings accounts and ways to automate your savings strategy.
• Your mortgage payment should be 25% of your monthly take-home income at most.
• Your down payment will likely be at least 3% of the home price, and your closing costs will be between an additional 2% and 6%.
• Homebuyers with a good credit rating and a low debt-to-credit ratio will secure better loan rates, which will lower the total cost.

Many of us spend hours scrolling through real estate listings, saving beautiful homes to our favorites and romanticizing life in our dream home. But now that you're preparing to buy a house, it's time to look at the whole picture. You want to define your deal breakers and deal makers. 

Consider the size, style and location of the home that you want. If you want to be near the city center, consider a condominium, townhome or rowhouse. If space is a priority, single-family homes in the suburbs or rural areas will allow you to stretch your home-buying dollar. Access to great schools is often a priority for buyers who have a family or are considering starting one. 

After you've determined what you want in a house and found a great neighborhood, it's time to set a budget. As a general rule, your monthly payment should be roughly 25% of your take-home income. So, if you're in a dual-income home, bringing in a combined total of $5,000 a month, you should stick to a monthly payment of $1,250 or less.

The home loan you choose will determine the minimum amount of money required for your down payment. For example, a conventional loan typically requires a minimum of 3% down. This would mean the lowest down payment for a $300,000 home would be $9,000. However, if you have extra money on hand, putting it toward the down payment may be worth it. Putting down less than 20% requires borrowers to purchase Private Mortgage Insurance (PMI). Your credit score has an impact on the cost of PMI for your loan. The Housing Finance Policy Center at the Urban Institute indicates that PMI costs 0.46% to 1.5% of the initial loan amount each year.

If you qualify for a Department of Veterans Affairs (VA) loan or a U.S. Department of Agriculture (USDA) loan, you may be able to buy a home with 0% down. However, you must meet the eligibility requirements to secure these types of mortgages.  

• Conventional loan: 3%
• FHA loan: 3.5%
• Jumbo loan: 10%
• VA loan: 0%
• USDA loan: 0%

Buying a home also means that you will have to pay closing costs, which are the fees associated with the purchase of a home. Closing costs include escrow funds, home appraisal, title search, attorney fees and mortgage lender fees. They are separate from the down payment and typically range from 2-6% of the borrowed amount. This means that if you plan to purchase a $300,000 home you will need between $6,000 and $18,000 to cover your closing costs. 

Borrowers need a credit score of 620 or higher to buy a house with a conventional mortgage loan. Some government-backed loans have lower requirements. For example, you can qualify for an FHA Loan with 3.5% down and a credit score of 580, or a credit score as low as 500 if you can manage a 10% down payment. If your credit score is low and you're hoping to qualify for a conventional loan, there are a few steps you can take to boost it.

There are two kinds of credit: revolving credit and installment credit. Revolving credit allows borrowers to spend up to a specific limit, pay it back over time, and borrow up to that limit again. Examples are credit cards and credit lines. Installment credit has a set term and fixed monthly payments. Examples are auto loans and student loans. Your credit score can increase if you have both types and consistently make payments.

Your debt-to-credit ratio is a measurement of the amount of credit that you are using compared with your total available credit. If you plan to apply for a mortgage, you want this ratio to be less than 30%. A low DTC is a signal to lenders that you are financially responsible and that you are able to take on additional debt. 

Monitor your credit score and file a dispute with the appropriate credit bureau (Experian, Equifax or Transunion) if you see an error. Addressing issues on your credit report can help you get better loan rates and easier access to new lines of credit.

To save for a house, you must determine where to cut back on your spending. Some areas where you might be able to save: 

• Streaming/subscription services: Look at how many streaming services or subscription-based products you pay for. If there are some you are barely using, cancel them.
• Eating out: On average, Americans spend roughly $2,500 to $3,500 each year at restaurants. This is especially significant when you consider that the average person spends between $300 and $500 on an entire month's worth of groceries. Limiting your restaurant outings is a quick and easy way to save money.
• Recreational shopping: Retail therapy or shopping with friends is a favorite pastime among many, but while you're in "saving mode," try to limit yourself to necessary purchases.
• Insurance providers: Home and auto insurance rates can vary from company to company. To make sure you're getting the best rates possible, get quotes from several insurance providers and look into money-back rewards programs when they are available.

If you're struggling to put money away for your future home, you might consider picking up a second job or a side hustle to help you save some extra cash. Some popular options include:

• Babysitting, house sitting or pet sitting
• Mowing lawns, landscaping or housekeeping
• Driving for Uber/Lyft, Grubhub or DoorDash
• Freelancing on sites like Fiverr

An automatic transfer is a great way to set your savings strategy on autopilot. If you tend to spend your entire paycheck, you may want to set up an automatic transfer to a savings or investment account. With this strategy, you can decide how much (and how often) you want to deposit funds. You could deposit a set amount every week or a percentage of your paycheck after you get paid. 

Some common ways to automate your savings:

• Recurring transfers: Schedule a recurring transfer from your checking account into a savings account.
• Round-up apps: Savings apps will round your debit and credit card purchases up to the nearest dollar and deposit the difference into a savings account.
• Direct deposit: If your employer allows it, you can split your paycheck so that a portion of it gets deposited into a savings account. 

There's nothing wrong with building your nest egg in a standard savings account. However, you have a few options if you'd like to see a more substantial return on your investment.

It's not uncommon for a typical savings account to have an annual percentage yield (APY) that's roughly 0.5%. A high-yield savings account can pay you significantly more, with APYs that are typically between 4% and 5%. If you parked $10,000 in a standard savings account, you'd likely make $50 in interest over a year. A high-yield account could deliver $500 in interest over the same term. 

You might also consider a money market checking account, which will deliver similar returns. Just keep in mind that money market accounts typically have stricter requirements when it comes to maintaining a minimum balance. 

Banks and credit unions offer CDs, and they typically carry a favorable interest rate. When you invest in a CD, the money must stay in the account for a specified length of time; you'll be penalized if you withdraw it early. That makes CDs a strong choice if you want to save money without the temptation of being able to make an easy withdrawal. Conversely, that also means your money is locked until the CD matures, and early withdrawal penalties can be significant.

Investing in the stock market provides the opportunity for greater returns, but it also comes with a higher level of risk since your investment is subject to market fluctuations. Consider investing only a portion of your money in stocks if you are willing to take on the potential for loss. 

Having the funds to cover your down payment and closing costs will allow you to make the leap toward homeownership. 

As a new homeowner, you'll want to prepare for the costs associated with routine home maintenance and more significant unexpected repairs. Consider setting money aside in savings each month to address potential issues. A commonly known rule of thumb is to save 1% to 4% of your home's value each year to cover these costs.