Mapping out your finances to save for a house can be overwhelming, especially if you already have other bills and rent to consider. However, it isn’t too late to start your journey toward homeownership. If you’re currently living in a rental and have always dreamt of owning a home of your own, consider these 5 tips for how to save for a house while renting.
How Much is Required for a Down Payment?
Down payment amounts are determined by the type of mortgage loan you’re seeking with some loans only requiring a minimum of 3% down. To avoid the additional cost of private mortgage insurance, which is insurance to protect the lender, buyers should prepare to put down a minimum of 20%. Private mortgage insurance is selected by the lender and will be added to your monthly mortgage payment. Check out “Private Mortgage Insurance: What is it and How Does it Work” to learn more.
5 Tips for How to Save for a House While Renting
1. Look for Ways to Save on Rent
One way to begin your saving journey is to reduce your monthly rent payment. Instead of renewing your lease, try moving to a smaller or cheaper place. While the moving costs, deposit, and initial rent may be costly at first, you could save hundreds of dollars compared to your current space. Another option for reducing your rent is to find a roommate to help split the costs so that you can save more money.
2. Address Existing Debt
One of the first items that mortgage lenders address is the homebuyer’s debt-to-income ratio. This percentage shows how much money is spent versus how much is earned. This is calculated by taking the minimum monthly debt payments divided by monthly pre-tax income. A DTI of 50% or less is recommended for most mortgage loans.
3. Assess Current Spending
When saving for any big financial goal, it is important to create a budget and stick to it. One common budgeting strategy is the 50/30/20 rule which breaks down your paycheck into three categories:
- 50% toward essentials like rent, food, and utilities.
- 30% toward lifestyle such as entertainment and eating out
- 20% toward financial priorities like debt, retirement, savings, and student loans.
When saving for a home, consider moving 5-10% of the lifestyle budget toward savings. While it may be challenging to cut out the little luxuries, seeing your savings grow is much more rewarding.
4. Build Your Credit
Credit cards build a credit history and when paid off regularly will positively impact your score. You can improve your credit score by making frequent “micropayments” on your monthly credit card bills to keep the balance down. Paying your bills and rent on time also improves your credit score. However, it is important to note that opening new credit cards or loans will generate hard inquiries on your credit report and can stay there for upwards of two years. Too many hard inquiries on your credit report can be a turn-off for lenders because it may look like you’re racking up debt.
5. Rent to Own Properties
Another way to begin your homeownership journey is to consider a rent-to-own agreement. In a rent-to-own agreement, you will be asked to pay a one-time, non-refundable fee called “option money” which gives the option to purchase the home in the future. The seller will give you the option to purchase the home after the rent period is over (typically 1-3 years). This arrangement is great for first-time buyers who are looking to build their credit score and save for a down payment. Some sellers may outline in the agreement that a percentage of the rent payment will be credited toward the purchase price.
Start Saving Today!
Saving for a house while renting may seem like a daunting task, but there are many benefits to homeownership that makes the saving worthwhile. Once you have saved up enough and are ready to purchase your home, talk to the team at Metropolitan Title to ensure your home is protected from the start.