How to Save for a Home, Even When It Feels Like You’ll Be Renting Forever

Monopoly made it seem so easy. But in real life, there’s no advancing to payday, and rent does not cost $16 in New York.

In fact, the median cost of a two-bedroom apartment rental in the U.S. is $1,178. That’s 35% of median take-home pay when you subtract taxes from the median household income.

And in the way of all medians, this means half of us are stretched even thinner than the middle-of-the-road median American family. (Let’s call them the Joneses.) Add in our collective $1.4 trillion in student loan debt in the U.S., and the thought of saving for a home sounds comical.

Yet repeatedly, surveys show that homeownership is still a staple of American financial ambition. One study from 2017 found that 68% of millennial homeowners plan to own multiple homes throughout their lives.

Here’s where to start if you’re one of the millions trying to save for a home.

Figure Out How Much You Need for a Down Payment

The first step is knowing how much you need to save. And how much you need for a down payment can depend, in part, on what kind of loan you’re seeking.

You’ve likely heard the traditional wisdom that says you should put down 20% of the home’s value so you won’t need mortgage insurance, but that doesn’t mean it’s your only (or best) option.

In 1934, the National Housing Act established the Federal Housing Administration (FHA) and, as a consequence, FHA loans. The idea is that the FHA insures loans from approved lenders, which limits the lenders’ risk. That means friendly terms for consumers, which look something like this:

If you have a credit score of at least 580, you could qualify for an FHA loan with a down payment of 3.5%. These loans also allow for a larger debt-to-income ratio than traditional mortgages and allow gifts to be used as down payments.

If your credit score is between 500 and 579, you’ll have a more difficult time being approved, but you could still qualify for an FHA loan with 10% down. If this is you, there are steps you can take to try to get to the 580 mark.

Other options with low down payments include what are conventional 97 mortgages, which require just 3% down. For veterans, there are VA loans that require nothing down.

Interest rates on FHA loans range from 4.2% to 5.99%.

As you compare mortgage lenders, you’ll be asked to provide information on your assets, expenses and household income to get prequalification. This will give you a general idea of how much you’ll need to have saved to move forward. The key here is patience. It’s important to compare lenders to be sure you’re getting the best terms you qualify for.

Once you select a lender, you’ll work with a mortgage professional to be formally preapproved for specific terms before you can make any offers.

What about that median family, you ask? Our median family, the Joneses, have credit scores in the 680s, which means they would hit the 3.5% qualification. They’d be looking for a home that costs about $216,000, according to Zillow. That means they’d need to save $7,560 for a down payment.

But that’s not all the Joneses have to consider. On average, closing costs run between 2% and 5% of the home’s value, which means the Joneses could face as much as $10,000 in additional fees — $3,700 is the national average for buyers — to finalize the purchase. These fees can be rolled into an FHA loan if the Joneses choose, but that means 30 years of interest payments on those closing costs.

Assuming they pay for closing costs upfront, the Joneses’ savings target would be just over $11,000.   

How to Plan for Additional Costs of Homeownership

It happens to the best of us: One minute, you decide to crunch numbers on a mortgage calculator; the next, you’ve realized your current rent covers the monthly cost of a private island.

But you should know that there’s much more to the story.

Your mortgage payment will be only a part of what you pay each month as a homeowner. You’ll also take on property taxes, homeowners insurance, mortgage insurance, possible homeowner association fees and maintenance costs.

Do your homework on the tax rate (also called millage) in your area. Get specific with potential lenders so you don’t run into unexpected fees. Once you find a home you’re interested in, you’ll need to have it inspected by professionals to get an estimate on the kind of repairs you may face in the near future.

According to The Balance, $177 of the median monthly mortgage payment goes toward taxes and insurance. What’s more, you should budget 1% of the home’s value annually for maintenance costs. Taking the Joneses’ $216,000 home as an example, expenses above the loan payment and principal would come to an extra $360 a month.

That Part About How to Save for a House

Once you define what your savings goal is, the real work will begin.

If you’re a first-time homebuyer, you may qualify for an assistance program in your state. But regardless of whether you qualify, having a plan for how to save for a house is a must.

You’ll want to familiarize yourself with budgeting methods to see what will work for you. What’s important is knowing exactly where your money goes and being able to justify each expense. The zero-based budget, for example, requires you to account for every cent.

Ask yourself of all nonessential spending: Is this worth putting off buying a home?

Think about how to save money on your big expenses. Cut down on your current cost of living by getting a roommate or joining the growing trend of coliving.

Would it make sense to move into a smaller house or apartment while you save? According to USA Today, the cost difference between two-bedroom and one-bedroom apartments can be as much as 30%.

But don’t ignore the smaller details of your finances.

As you begin to put money away, consider whether you’re gathering as much interest as possible, for example. Some accounts gather upward of 1% interest. It may not sound like much, but it can make a difference over time.

Every dollar counts.

Jake Bateman is a former editor at The Penny Hoarder.