Owning a home is not only a life goal for many people, but it can also be a way to help ensure financial security for their families. Data published by the Federal Reserve shows the median homeowner holds almost 40 times the household wealth of renters, making homeownership an attractive prospect.
However, with the median home price in America eclipsing $400,000 in 2023, finding enough money to begin saving for even just a 10-20% down payment might seem like an impossible task.
While taking meaningful steps to save for a house is by no means easy, dedicating yourself to making a few smart financial adjustments can make it entirely possible. For renters wishing to take their first step onto the property ladder, below are 6 actionable tips to start saving for a house while renting.
1. Start a Down Payment Fund
A down payment is the upfront cash you need to pay to purchase a home. While it’s common for a down payment to equal 10-20% of a home’s purchase price, some smart planning can reduce this figure significantly. In fact, the National Association of REALTORS® (NAR) reveals that most first-time homebuyers actually pay between 6-7% on an average down payment, with a further 3-6% covered by closing costs.
When saving for a down payment as a renter, your percentage will depend on the type of mortgage loan you secure, so it’s wise to review all available options. Common types of mortgage loans include:
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Conventional Loans:
A conventional loan is issued by a private lender, so eligibility requirements can differ wildly. In some cases, conventional loans allow for down payments of as little as 3%.
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VA/USDA Loans:
USDA and VA loans are backed by the US Department of Veterans Affairs and the US Department of Agriculture respectively, eligible borrowers can often avoid down payments.
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FHA Loans:
FHA loans are backed by the Federal Housing Administration and assess your down payment based on your credit score, a good credit score can help you qualify for a 3.5% payment.
2. Organize Your Financial Life
In order to save for a house, you’ll need to ensure your day-to-day finances are in order. Homebuying costs can be mitigated to some extent by demonstrating to mortgage lenders that you’re sensible with money, so taking the time to financially prepare for homeownership is always a smart decision.
Important factors to consider include:
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Credit Score:
Conventional mortgages typically require a credit score of 620+, keep in mind that factors like missed credit card payments and outstanding debts can negatively impact your credit score.
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Financial Documents:
Lenders require evidence of your financial history, so make sure to keep records of things like bank statements, investment account records, tax returns, and pay stubs.
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Debt-To-Income (DTI) Ratio:
This concerns the percentage of your income that you pay per month to satisfy debts.
3. Cut Out Unnecessary Expenses
Cutting out avoidable costs can help you save some extra cash and put more money aside to cover your down payment, as well as help you to better organize your financial life overall. Avoid impulse purchases like coffee and take-out meals, and consider renegotiating ongoing subscription costs like:
- TV and streaming services
- Cell phone payment plans
- Insurance policies
- Internet packages
- Software subscription fees
4. Open a Down Payment Savings Account
Cutting out costs can help you save extra money, but securing some of your monthly income alongside any gift money you receive within a separate savings account can have a greater impact on your ability to save for a home. Making monthly payments to an account with a good interest rate will set you up to create a reliable savings plan, and prepare you for later tasks like making a monthly mortgage payment.
Consider one of the following types of savings accounts:
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Money Market Accounts (MMA):
Opening a money market account can help you to save money for a house without locking your funds away. MMAs often offer higher interest rates than a typical savings account, helping you earn money over time, but you can still release funds when needed.
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High-Yield Savings Accounts (HYSA):
HYSA accounts offer interest rates that can be 10-20 times higher than the national average, forming the basis of a solid saving plan. Making a direct deposit to a HYSA as part of your monthly budget can be a great way to start saving for a down payment.
5. Automate Your Savings Accounts
Making the most of your take-home pay in an account with a good savings rate can be simplified by setting up an automated monthly payment money transfer. Consider this like your other fixed expenses, only in this case, your spending money will be put to good use earning interest for your down payment.
Automated savings can be combined with down payment assistance programs to help renters secure enough funds to buy their first home. Combining savings, gift monies and low-interest loans offered by down payment assistance programs has helped almost 40% of homeowners purchase their properties.
6. Explore Extra Avenues of Income
Finally, it can also be worth looking for ways to earn a little extra income to supplement your existing wages. Money secured through odd jobs and freelance work can help to enhance your saving plans but remember, any earnings over $400 per year will be subject to income tax.
A few ideas to consider include:
- Selling items online
- Internet freelancing services
- Part-time delivery services