With respect to a report from the Federal Reserve, the median homeowner has 38 times the household wealth of renters in the USA. Homeownership actually builds equity by providing forced savings, which can put many homeowners in a better financial position than renters.
However, with average new home prices in the US exceeding $400,000, saving a down payment of 10-20% of the purchase price of a house can feel like an impossible mission especially if you are on a tight income.
In this article, I will walk you through the process of saving up for a home purchase and outline tips for finding down payment assistance to lower your initial homebuying expenses.
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How Long Does It Take To Save a Down Payment?
At the start of the year 2024, the average price for a newly built home in the United States was $420,800, but it is good to consider the fact that home prices in the Us actually also depends on the region.
Below is how home prices vary by region in the United States:
- Northeast: $785,300
- Midwest: $375,800
- West: $548,400
- South: $376,500
Even if you are living in a high-cost of living area, you should not quickly conclude that you will need to save $100,000 or more for your down payment. With respect to a National Association of Realtors (NAR) report, most first-time homeowners need to put between 6% and 7% down on home purchases. More to that, you can expect to pay another 3%-6% of the home's purchase price in closing cost.
With that said, let us be realistic and all assume that you will need about $40,000 to cover the down payment and closing costs on your home. Below are some timelines on how long that could take based on your savings rate.
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Time Taken To Save Up a Down Payment
Savings rate Years to reach $40,000
$1,000/month - 3.33 (40 months)
$1,500/month - 2.22 years (26.67 months)
$2,000/month - 1.67 years (20 months)
$2,500/month - 1.33 years (16 months)
$3,000/month - 1.11 years (13.33 months)
$3,500/month - .95 years (11.43 months)
It is obvious that with a lower down payment, you can easily get into a home sooner than later and there is also high probability of putting more money down.
Regardless of whether you choose to put in more or less down on your home, you will still need a significant amount of money to get to the closing table. It might seem almost impossible for you to save so much in a short while but once you approach it with the correct plan you will find yourself at the finish line.
Ways to Save Money For a House
Saving money for a house in the United States might be a tedious journey especially for individuals already in debt and with a tight budget but below are some ways you can follow in order to catalize your savings.
1. Assess Your Current Financial Situation
It is left for you to figure out where you are financially and if you are not managing your money properly, adding a home to the mix could only end up in disaster.
Examine yourself in a mirror and determine if there are some financial missteps, habits, or circumstances to address.
Here, you will also need to evaluate your income, expenses, and debt to determine how much house you can afford and what the down payment and closing costs expenses will be related to a house in that price range.
Below is a high level check list of how to financially prepare for homeownership:
- Credit score
- Debt-to-income ratio
- Documentation
2. Set a Clear Savings Goal
There is the 28/36 rule which is an approach to help you determine the maximum amount of debt a household should carry. This rule actually states that an individual or household should spend no more than 28% of gross monthly income on total housing expenses and not more than 36% on servicing debt, which includes their mortgage alongside other debt such as credit card payments.
Like for example, provided that you earn a gross income of $4,000 per month and you decide to follow the 26/36 rule, your maximum monthly mortgage payment should be no higher than $1,120 or 28% of your monthly income.
On this same note, your total monthly payment should not exceed $1,440 per month or 36% of your monthly income, which means that you can afford up to $320 monthly to service your debt.
As soon as you have established your maximum allowable monthly housing payment, it will be easier to come up with your total housing budget and determine the down payment required.
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3. Establish a Savings Plan
Incase you are not yet okay with the amount of money you are able to save base on your budget, it might be time to tweak your savings plan. Implementing your savings plan might include some innovative strategies such as:
Setting Up a Separate Savings Account:
It is quite obvious that trying to save extra money in the same checking account you use for expenses mans you could be mixing money and constantly dipping into your home down payment savings. Sure you are also aware that checking accounts usually do not pay very high interest. So it will be wise idea to separate your down payment funds into a savings account.
Keep in mind that where you put your money greatly matters since you will probably be needing this money in the less than 6 years, so you should not put it in any type of investment account, like a brokerage account or mutual fund. Instead, you should consider a high-yield savings account or money market account.
Automate Your Savings
Another helpful strategy is to have money automatically deducted from your paycheck. Several employers will let you divide your paycheck into separate accounts for direct deposit. You should make use of this feature to ensure you are saving a certain amount of money every single paycheck.
Have it automatically sent to your down payment savings account so that you are not tempted to withdraw money frequently from the funds meant for your down payment.
Change Your Lifestyle
If you truly want to catalyze your savings rate, then you need to also consider examining your lifestyle. This may include some unpleasant features such as even moving in with relatives in order to save rent costs, taking on side gigs, aggressively paying down debt, and some other drastic measures.
4. Increase Your Income
If you have a way via which you can multiply your income stream, then adding on your income can really go a long way to help increase your savings progress and below are some tips to help increase your income:
- Obtaining a promotion at your job.
- Take on a side hustle.
- Changing jobs for a higher paying position
- start a small business
- Sell items around the house for extra cash
- Search for passive income opportunities
- Adjust your income tax withholding
5. Reduce On Your Expenses
Expenses are one of the major incomes eaters in everybody's income especially if you try to satisfy everything you want rather than focusing on the main things that you need. Below are a few expenses you can reduce or eliminate so as to increase your savings:
- Streaming and Cable
- Dining out, entertainment and travel
- Cut down on your recurring subscriptions especially the ones which no longer need
- Always try to shop with discounts
Can I Buy a House With No Down Payment?
Yes you are able to buy a house with no down payment. Government-backed loans such as FHA (3.5% down), VA (0% down) and USDA (0% down) loans require little or no money down for a home purchase. You might also want to check out this list of local down payment assistance programs here at www.hud.gov.
Final Thoughts: How to Save Money For a House
It is clear that saving for a house requires careful financial planning and consistent effort. By setting a clear goal, cutting expenses, increasing income, and making smart financial choices, you can accumulate the necessary funds and achieve homeownership sooner than you think. Start implementing these steps today and move closer to owning your dream home.