Trying to save for a new house? Here’s how to do it right

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There’s a lot of factors to consider when you’re trying to figure out how much money you’ll need to buy a house. How to save for a house might seem impossible unless you know the right steps to follow.

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Step 1: Determine your down payment

If you’re wondering how to save for a house there’s one myth worth busting upfront: You don’t need a 20% down payment. Many homebuyers believe they need a larger down payment than lenders actually require. The table below shows how much you’d need to save for a house depending on the different mortgage programs.

Loan program What it is Minimum down payment
Conventional loan Mortgage program with more stringent qualifying guidelines set by Fannie Mae and Freddie Mac 3%
FHA Mortgage program that offers loans backed by the Federal Housing Administration (FHA) with more lenient qualifying requirements than conventional loans 3.5%
VA Mortgage program for eligible military borrowers backed by the U.S. Department of Veterans Affairs (VA) 0%
USDA Mortgage program for low to moderate income borrowers to buy homes in designated rural areas backed by the U.S. Department of Agriculture (USDA) 0%

THINGS TO KNOW

If you make less than a 20% down payment, you’ll typically have to pay private mortgage insurance on a conventional loan to protect the lender if you fail to make payments and the lender forecloses.  FHA loans require two types of FHA mortgage insurance regardless of your down payment. USDA loans require an upfront and monthly guarantee fee that work like FHA mortgage insurance.  VA loans don’t require mortgage insurance, although a funding fee is typically charged to recoup losses on VA foreclosures.

Step 2: Don’t forget closing costs and maintenance expenses

Down payment is not the only factor to consider when you’re calculating how much to save for a house. Make sure you set aside funds for the following items as well.

Closing costs. You’ll typically spend between 2% and 6% of your loan amount on closing costs. They may include fees the lender charges to approve your loan, title fees to verify there are no claims against the home you’re buying and ongoing costs such as property taxes and homeowners insurance. You can ask the seller to pay the costs, your lender can increase your rate and pay them or you can get a gift from a relative.

Maintenance and repairs. As a homeowner, you’re responsible for the repairs and maintenance of your home. A general rule of thumb is to set aside 1% of your home’s value in a repair and maintenance account so you don’t end up using a credit card to pay for these expenses.

Step 3: Choose the best way to save for a house

Once you’re done with your down payment, closing costs and maintenance cost calculations, it’s time to review your budget and financial resources and decide how you want to use your funds toward a home purchase. Some of the most common ways to budget for a home include:

  • Cutting your monthly budget. Review your spending habits and cut back on entertainment, takeout food and other nonessential expenses so you have more room for down payment savings.
  • Stashing cash from gifts and bonuses. Holiday and birthday gift checks may add up quickly if you get in the habit of automatically putting them into a dedicated down payment amount. Any overtime or bonus earnings can help you build savings even quicker.
  • Borrowing from your 401(k) for a down payment. Most company retirement accounts allow you to borrow money from a 401(k) for a down payment. Check the terms of withdrawal before you apply for a home loan — it often takes several weeks for a 401(k) loan to be processed.
  • Selling stock to buy a house. Converting your stock to a down payment may be worth it if you’re short on cash funds.  Check with your financial advisor to make sure you choose the right stocks to liquidate.
  • Starting a side-hustle. A part-time job may help you stockpile cash quickly. Just remember to document any money you deposit.
  • Creating a down payment savings account. Setting up an automatic withdrawal each month is a good way to save for a house without thinking about it.
  • Living rent-free for a while. If you’re just out of college, it may be worth it to hang out at home and save cash to buy a home, rather than immediately heading into the world as a renter.

How much money should you save for a house?

How much you should save for a house often comes down to how soon you want to buy a home, whether you can afford the monthly payment and how long you plan to stay in the home.

YOU SHOULD SAVE MORE FOR A HOUSE IF:

  • You want to make a larger down payment so you have a lower house payment
  • You have the cash resources easily available to make a larger down payment
  • You want to avoid or reduce the amount of mortgage insurance you pay
  • You want to have more equity in your home after you purchase it

YOU SHOULD MAKE A MINIMUM DOWN PAYMENT IF:

  • You don’t have the funds saved for a large down payment
  • You can afford a higher monthly payment
  • You have long term plans to stay in the home

The tables below provide you with the pros and cons of making a 20% down payment versus making the minimum payment.

Pros and cons of a 20% down payment
Pros Cons
  • You’ll have a lower monthly payment
  • You’ll pay less closing costs
  • You’ll have more equity in your home at closing
  • You won’t pay mortgage insurance on a conventional loan
  • You’ll pay lower monthly mortgage insurance on an FHA loan
  • You’ll pay a lower funding fee for VA loan
  • You’ll have more equity to cover costs if you have to sell your home suddenly
  • You’ll deplete more of your cash resources
  • You may have to delay purchasing a home to save the funds

Pros and cons of a minimum down payment
Pros Cons
  • You’ll leave a financial cushion for other expenses or investment goals
  • You may be able to buy a home sooner than later
  • Your tax-deductible mortgage interest charges write-off may be higher since you’re borrowing more
  • You’ll pay higher mortgage insurance for an FHA or conventional loan
  • You’ll pay a higher funding fee for a VA loan
  • You may lose money if you have to sell your home suddenly
  • You’ll pay higher closing costs because you’re borrowing more

THINGS TO KNOW
You’re not required to pay the real estate commissions when you’re buying a home: The seller pays them and the cost may be as high as 6% of your home’s price. Keep that in mind if you make a minimum down payment and have to sell your home soon after you buy because of a job change or family emergency. You could be stuck paying some or all of the costs of selling your home out of pocket.

Consider buying a house with no money down

You may be able to buy a home much sooner if you only need to budget for closing costs. Below is a breakdown of other no down payment options, also called “zero-down mortgages” and additional details about the VA and USDA no-down-payment loans:

VA loans. If you served in the military and have sufficient entitlement, in most cases a VA mortgage doesn’t require a down payment. One big advantage is you don’t pay any mortgage insurance, which often makes your VA loan payment lower than a comparable FHA or conventional loan. However, you may have to pay a VA funding fee of 2.3% to 3.6% for the zero down option depending on whether you’ve used your home loan benefits before. Veterans with a service-related disability may be eligible for a VA funding fee exemption.

USDA loans. If your income is at or below the USDA limits, you may qualify for a no-down-payment USDA mortgage. You’ll pay an upfront and monthly guarantee fee that works like a cheaper version of FHA mortgage insurance. However, only homes located in USDA-designated rural areas are eligible for USDA financing.

Down payment assistance. Local housing authorities and state government housing agencies may offer down payment assistance programs depending on your income and the neighborhood you’re buying in. You’ll typically only qualify if your income is at or below the program maximums and you may need to live in the home for a set time to avoid paying back the down payment funds.

This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.

More from MediaFeed:

20 affordable cities for homebuyers

20 affordable cities for homebuyers

Home is where the heart is, but it can also be where all the money is. Housing is one of the biggest living expenses adults incur on a regular basis.

Whether someone is renting or buying, finding a good deal is usually the goal. Learning about local housing market trends can be helpful.

To make finding budget-friendly housing easier, keep reading to uncover the 20 most affordable cities, as well as the average home price and average cost per square foot of homes in those areas.

Related: Explaining the home buying process

Tiago_Fernandez / istockphoto

Average Home Price: $266,000

Average Price Per Square Foot: $118

U.S. News ranked Huntsville as the most affordable place to live out of their ranking of the 150 most populous metro areas in the U.S. for two years in a row.

Residents tend to have an above-average median annual salary and spend only 19.16% of their income on living expenses. Those who are craving some southern charm may just find what they’re looking for in Huntsville.

Sean Pavone / istockphoto

Average Home Price: $172,000

Average Price Per Square Foot: $148

When you consider the fact that the cost of living in Des Moines is lower than the national average and that housing prices in the area are decently below the national median, it’s pretty clear why Des Moines is a great place to live. Unlike many cities, home prices actually increase as you head out to the suburbs, and downtown housing prices are more reasonable.

dangarneau / istockphoto

Average Home Price: $210,000

Average Price Per Square Foot: $144

In the past, Pittsburgh lost some of its younger population to metro areas with a stronger job market, but today’s affordable housing market and job growth is attracting younger residents again. There are multiple universities in the area, such as the prestigious Carnegie Mellon University, that also attract a vibrant and youthful population.

tifonimages/ istockphoto

Average Home Price: $212,000

Average Price Per Square Foot: $128

The annual average income in Grand Rapids is smaller than the national average, but residents may find their dollars stretch much further in this city due to a lower cost of living.

Housing costs are less than the national median in this area and residents tend to spend less on living expenses, such as groceries and health care, than those who are located in other areas of the country.

depositphotos.com

Average Home Price: $185,000

Average Price Per Square Foot: $102

Indianapolis has a lively downtown area that is quite walkable and full of fun things to do while taking advantage of big-city amenities. Those looking for a more suburban feel can enjoy outer neighborhoods that still offer shopping and entertainment venues without all the hustle and bustle of being in downtown Indianapolis.

Sean Pavone / istockphoto

Average Home Price: $246,000

Average Price Per Square Foot: $129

Good-old Baton Rouge delivers the charm of New Orleans without the hordes of tourists. Warm weather all year-round and close access to the Mississippi River lends the city a romantic feel.

benkrut / istockphoto

Average Home Price: $190,000

Average Price Per Square Foot: $118

Cincinnati has a reputation for being a sleepy Midwestern metro area, but don’t believe the rumors! This city can offer tons of great amenities from museums, to professional sports teams, to a bevy of great restaurants.

aceshot / istockphoto

Average Home Price: $185,000

Average Price Per Square Foot: $123

Buffalo is currently experiencing a sort of renaissance thanks to a rapidly developing waterfront and being home to one of the nation’s most advanced medical corridors.

Local government support has led to an increasing number of local businesses, which means there are likely some pretty good job opportunities to be found for career builders in Buffalo.

pabradyphoto/ istockphoto

Average Home Price: $215,000

Average Price Per Square Foot: $121

Families will love spending their weekends in Louisville, thanks to having easy access to the Louisville Zoo, Kentucky Science Center and the Louisville Slugger Museum. Day by day, this city is becoming more diverse. Residents are moving in from around the world and the city is supportive of the LGBT community.

Zillow

Average Home Price: $117,000

Average Price Per Square Foot: $74

Like many Midwestern cities, Youngstown lives up to the hype when it comes to having friendly neighbors who love to celebrate their community. This city has a mix of everything residents could want. The downtown area is surrounded by farmland, which allows residents to shop for produce from local farms!

Sean Pavone / istockphoto

Average Home Price: $217,000

Average Price Per Square Foot: $119

Omaha residents sure know how to save a pretty penny! The cost of living in Omaha is so much lower than the national average that renters typically pay $100 less per month than the average American does on housing. When it comes time to buy a home, median home prices are slightly lower than other spots around America.

DepositPhotos.com

Average Home Price: $220,000

Average Price Per Square Foot: $118

More and more millennials are flocking to Kansas City to take advantage of a fair cost of living and a good job market. This younger generation has helped foster a creative community in Kansas City. Locals can enjoy unique boutiques, independent coffee shops and colorful murals throughout the city.

Zillow

Average Home Price: $250,000

Average Price Per Square Foot: $139

In recent years, Greenville has seen an uptick in home sales. More than 40% of Greenville residents own their home and real estate developers are bringing new housing options to downtown. Home prices are lower in Greenville than the national median, so it’s easy to see why so many people are ready to buy homes in the area.

Zillow

Average Home Price: $159,000

Average Price Per Square Foot: $107

For families looking for big city amenities mixed with small town charm, Fort Wayne can meet all of their needs and more. This midsize metropolitan area in the heart of the Midwest is a great place to buy a home, start a business, build a career or bring up children. The annual BuskerFest devoted to street performers is a local event that can’t be missed.

wellesenterprises / istockphoto

Average Home Price: $165,000

Average Price Per Square Foot: $114

Hickory locals happily enjoy a moderate climate and stunning mountain views throughout the Hickory-Lenoir-Morganton area. Also known as the Catawba Valley, this area is home to many retirees and families. Lately, more and more young professionals are beginning to see the Hickory appeal.

Zillow

Average Home Price: $210,000

Average Price Per Square Foot: $115

If you love football, you’ll appreciate the fact that Green Bay is home to the Green Bay Packers, which is one of the most storied football franchises in the NFL. For non-sports fans, there are tons of big-city amenities to appreciate, including a bustling arts and entertainment scene, plenty of higher education opportunities and a thriving downtown area.

DepositPhotos.com

Average Home Price: $190,000

Average Price Per Square Foot: $139

This historic metro area houses almost 3 million people (known as St. Louisans) and is known for being a tight-knit community that is very family-friendly. Hometown loyalty is strong in St. Louis, and many residents choose to come back after heading off to college or moving somewhere else for a while.

DepositPhotos.com

Average Home Price: $168,000

Average Price Per Square Foot: $102

This fun and quirky city keeps locals busy with plenty of theaters, museums, live music, a craft brewery scene, farmers markets and even chili cook-offs. For those who love to shop, the Kalamazoo Mall is popular and well known for being the nation’s first outdoor pedestrian mall.

DepositPhotos.com

Average Home Price: $225

Average Price Per Square Foot: $120

Lincoln has a thriving economy, a low unemployment rate, and is considered to be a part of the “Silicon Prairie” due to being home to some of Nebraska’s biggest tech companies. This vibrant city is packed full of college students and the 85,000 football fans who flock to games during the fall.

Miriam Bade / istockphoto

Average Home Price: $184,000

Average Price Per Square Foot: $103

This scenic city has a rich history that predates the Revolutionary War. Today, Spartanburg is a hub of innovation, and it’s home to Denny’s headquarters and the first full-time North American BMW plant. Career opportunities aside, Spartanburg has seven institutions of higher learning and is a foodie hotspot thanks to the bustling food scene in the area.

Zillow

Even the most affordable homes can cost a pretty penny, which is where mortgages come in. Consumers may compare mortgage loan rates and terms from commercial banks, mortgage companies, and certain financial institutions. Typically, certain requirements relating to credit scores and income level help determine if a consumer will receive a mortgage and what their rates and terms are.

When preparing to apply for a mortgage, it can be helpful to consider multiple lenders, comparing loan terms to get an idea of what might work for an applicant’s financial situation. 

Asking lenders for a preapproval or prequalification letter can help mortgage applicants better understand what type of mortgage terms they may be offered.

Learn more:

How to buy a house out of stateWhat do I need to buy a house?

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