How to Save for a House While Maintaining Your Budget
Buying a home is still a key financial goal for many people, but how can you save for a home and stay on budget?
Contributing Writer at Tally
July 7, 2022
Buying a home is a major financial goal for many people, but it's not always a reality due to the upfront cash requirements. This is where an aggressive savings plan can help you tuck away the cash you need to make this financial goal a reality.
This guide will cover how to save for a house while maintaining your monthly budget. We’ve also included some tips to help you reach your goals faster.
Ready to start saving?
How to save for a house
A home is generally the largest purchase you’ll ever make, so having a firm savings plan is critical to your success. Here are some tips to help you save cash to buy your new home.
Before saving for a house, you must know how much you need. With this number in mind, you can work towards smaller, bite-sized goals. To set up your savings goals, look at the upfront costs you’ll need to buy the home you want, including the down payment, closing costs and moving expenses.
The down payment is one of the biggest upfront expenses you’ll run into when buying a new home. Depending on the loan type, this can be as low as 3% of the home’s purchase price, but some lenders require at least 20% down. Some 0% down payment mortgage options exist, but these are special government-backed loans, like VA and USDAhome loan programs with strict eligibility requirements.
Your down payment savings amount will depend on a handful of variables:
Your timeline: If you want to own a home as soon as possible, you may want to shoot for the bare minimum 3% down payment. However, if you are willing to wait, you can save a larger down payment, lowering your interest rate and monthly payments. Also, may you have a better chance of avoiding private mortgage insurance (PMI) with a larger down payment.
Your credit score: Lenders are more flexible with their down payment requirements if you have a good credit score. However, if your credit report is blemished, you may find that mortgage lenders won’t offer you a 3% down option. Instead, you could be stuck with 10% down or more.
Your budget: Of course, the bigger your home budget is, the more you need to save as a down payment. If you qualify for a 3% down mortgage on a $500,000 home, you’ll need $15,000. However, if you plan to spend only $250,000, that amount falls to just $7,500.
Your lender: Every lender has its own down payment requirements (unless you’re leveraging a government-backed loan, like an FHA loan), so it’s best to contact the one(s) you’re considering to learn more.
Once you go through these variables, you can easily determine your down payment needs by multiplying your anticipated home budget by the percentage you plan to use as a down payment. So, if you plan to spend $500,000 and have determined you need a 5% down payment, you’ll need to save $25,000 for this.
Other significant expenses in the home-buying process include closing costs, which you’ll need to pay to buy the home.
Closing costs can include:
Prepaid homeowner’s insurance
Prepaid property taxes
These fees vary by lender but are generally about 3% to 6% of the home’s selling price. So, if you have a $500,000 budget for a home, you can expect to pay $15,000 to $30,000 in closing costs.
Sometimes, you can roll some closing costs into the mortgage to save on upfront fees, but this will increase your monthly payment and result in higher interest rates and other unfavorable loan terms.
Once you receive your preapproval from a lender, it should be able to provide you with closing cost estimates based on your budget and other assumptions. This will help you home in on a number. However, if you’re not ready for preapproval yet, you can multiply your anticipated budget by 6% to get a high-end savings estimate.
So, on that $500,000 budget, you’d want to save $30,000 for closing costs to ensure you have enough money to cover the high end of the expenses. Then, if you end up with lower closing costs, you can use the remaining savings to cover other expenses.
Moving costs are an oft-forgotten part of the home-buying process. These costs include:
Renting a truck
Potential unpaid time off for the move
Repairs to your existing rental property, if applicable
Call around to several truck rental companies and moving companies to get rental and labor estimates early in the process. You can also call cleaning companies to estimate move-out cleaning services to ensure your rental is in good shape for the next tenant.
Add up all these costs and add a 10% or 15% buffer for unexpected price increases or extra fees.
Review your monthly budget
To meet your home savings goal, you’ll want to look at your budget and see where you can save money to pad the savings.
Start with services you rarely use, such as old streaming services or premium cable subscriptions. You can also shop for cheaper car insurance rates or take out a debt consolidation loan to combine your high-interest credit card payments into one lower monthly mortgage payment.
Pick up a side hustle
After trimming your budget to maximize your monthly savings, your next step toward maximizing savings every month is to earn more cash. You can do this on-demand with a side hustle. Today’s gig economy includes food delivery, ride-sharing, freelancing and numerous other options you can do in your spare time without affecting your full-time job.
Find the right side hustle for you and funnel all that extra income into your house savings plan.
Automate your savings and earn interest
With the budget trimmed and side hustle in place, you now have a firm grasp on how much cash you can save per month toward your new home. Execute this savings plan by setting up an automated transfer from your checking account into a savings account. Treat this as a monthly bill, so you don’t fall short or miss a monthly transfer.
While you’re at it, open a high-yield savings account (HYSA) or a money market account to hold your savings. This way, you’re also earning interest to help pad your savings slightly. Sure, the interest won’t be huge — likely 1% annual percentage yield (APY) or less — but every little bit helps.
Stash any extra cash
If you get a raise, bonus, big income tax refund check or any other windfall, it may be tempting to roll that into your budget and spend it. Instead of spending it, though, stash that extra money in your HYSA to give your house savings a boost.
Right now, you may want to spend that cash, but your future homeowner self will thank you for the foresight.
Monitor your progress
As you continue executing your home savings plan, keep an eye on your savings balance and compare it to your goal. As an extra motivating factor, you can create a savings gauge that you hang on your wall and update monthly. This way, you always have a visual reminder of why you’re living on the budget you created.
The path to homeownership starts with an effective saving strategy
Being a homeowner is a huge financial goal for many people, but the savings portion is often a stumbling block. You need a significant amount of cash to get a home loan, which puts homeownership out of reach for many. However, by following the above steps carefully, you can start to create enough of a budget surplus to save freely for your new home.
If credit card bills stand in the way of your new home savings, the Tally† credit card repayment app can help. Our app helps manage credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to pay off higher-interest credit cards more efficiently.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.