Buying your first house is one of the most exciting financial decisions you’ll make. It’s also one of the most stressful. Be prepared to start shopping for your new home by learning how to save for a house.
Before you can start saving for a home, you need to know how much you can afford.
Experts used to suggest you can afford a home price up to three times your yearly income.
Affordability on paper, however, is a lot different than reality. Everyone’s financial situation is unique.
You’ll want to keep your other debt and expenses in mind when saving for a house, in addition to your credit score.
A better way to think about how much you can afford is by looking at your monthly payment. What monthly payment is within your budget?
There are a few things to look at to help you understand what you can afford.
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Your debt-to-income (DTI) ratio is the amount of your income that goes to your outstanding debt.
This percentage can have a big impact on how you save for a house. The lower your DTI percentage, the better.
A low DTI ratio means you make significantly more money than you owe each month.
Lenders use your DTI percentage as part of the process to determine your home loan terms.
Someone with a lower DTI ratio may qualify for a better interest rate on their mortgage.
A lower interest rate means a lower monthly payment on your home.
Breaking down the purchase price of a home into a monthly payment lets you know if you can afford it or not.
You can estimate your monthly payment by using a mortgage payment calculator.
Note: Remember that this calculation may not include the cost of property taxes or homeowners insurance.
The monthly payment of your new home isn’t the only expense you’ll have. While finding the right monthly payment is important, you also have to think about less-obvious costs.
Some expenses you might have to cover include:
You might have heard that you have to have a 20% down payment to buy a home. That’s a pretty big percentage of something that costs hundreds of thousands of dollars.
The good news? You don’t have to put down 20% to get a mortgage. Most lenders don’t require that much for approval. Some conventional loans have down payment requirements as low as 3%.
The benefit of putting 20% down is avoiding private mortgage insurance (PMI).
In addition, the more you put down, the less you’ll have to borrow to buy the home.
Private mortgage insurance (PMI) protects your lender if you can’t make payments on your home.
The cost of PMI is added to your monthly payment. In the event you default on your loan, your lender can use the insurance to recoup the cost of your mortgage.
You can remove the PMI from your mortgage once you have 20% equity in your home.
The US government offers various loan programs to help homebuyers get into their new homes.
However, applicants must meet certain eligibility requirements for each program.
It’s important to note that these loans aren’t from the government. Instead, the government backs the loans through the program.
Approved lenders provide the loans and the government insures them. The lender is then protected if you default on the loan.
The Federal Housing Administration (FHA) loan program lets you buy a home with fewer financial requirements than a traditional mortgage.
Down payments can be as low as 3.5% on FHA loans, which is helpful for first-time homebuyers.
However, you will have to pay mortgage insurance for the life of the loan. That means you can’t remove the mortgage insurance when you reach 20% equity.
The lending requirements also tend to be more relaxed. You may find it easier to qualify for an FHA loan if you have a poor credit score or a bankruptcy on your credit report.
The US Department of Veterans Affairs provides loan programs for active-duty military, veterans, and certain military families.
There’s no down payment requirement for VA loans and you often get access to the best interest rates.
VA loans also have limited closing costs and you won’t have to pay for mortgage insurance.
The United States Department of Agriculture backs loans for those interested in buying a house in a rural area.
Like VA loans, there are no down payment requirements for USDA home loans.
The program does have income requirements, however, and higher earners won’t be eligible for the program.
There are a lot of different ways to save money for a house—and none of them are wrong.
As long as you’re putting money toward your savings goal, you’re making progress.
That being said, some methods can help you maximize your savings, such as:
Knowing how to save for a house before you start looking will make home shopping much less stressful.
You’ll be able to save up and buy when you’re ready. Get started on your journey to owning a home by putting these savings tips to work.