Saving for a House Can Seem Overwhelming: 6 Steps That Will Help You Get to Your Ultimate Goal

Last Updated on July 21, 2021

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Saving for a house can be extremely intimidating if you don’t know where to start. Here is a step-by-step guide for buying the home of your dreams.

Step One: Start Saving For a House

If you do not have a monthly family budget already: create one. Write it down. Create a PDF, or just put it on lined yellow paper. If you are married, do this together. Consider how much you earn each month, and then how much you could earn if you made plausible lifestyle changes.

If you already have a family budget, look at it with fresh eyes and rework it as needed. Then consider how much you save each month, and how much you could save. For example, if one or both of you commute to work, and if this entails a considerable expense: could you work from home?

Step Two: Think About a Down Payment

Research what the housing market is like where you are, and get a sense of what a reasonable price would be. What percentage will serve as a down payment? That varies wildly.

But what Zillow calls the ideal down payment” is 20%.

After all, if you pay 20% up front, this will reduce the interest you will have to pay. This will also limit your monthly mortgage payments, and may remove the private mortgage insurance you could otherwise have to pay. It is, of course, possible to get deals in which the down payment is considerably less than that.

Saving for a house can be difficult. Down payments make it easier.

There are certain contexts in which it may be sensible to arrange a no-money-down mortgage. But for most of you, consider what you are prepared to pay as a down payment. How large is the gap between what you will need and what you now have? Could you persuade family members to make a personal loan or even a gift in order to help you close that gap?

Step Three: Set a Timeline

This step may be critical as a psychological matter. You ought to set a timeline for yourself. If you have followed the first two steps you can come up with reasonable target dates.

“If I begin saving today, doing more overtime hours at work, I should be able to start looking for a pre-qualified level by month X. If I can secure that, I will work toward a pre-approval in X + 1, and I’ll go into contract on my dream house in X + 2.” Don’t just tell yourself “as soon as possible.” Attach specific months to specific stages along the way.

Step Four: Do Your Research

Suppose you have done these assessments, and started saving for a house according to your timeline. There is a specific house in which you now have a lot of interest. But the price? A little out of reach. Here you may want to contact an agent specifically to ask the realtor to do a comparative market analysis (CMA). The CMA report may contain the ammunition that will allow you to offer less.

Step Five: No Money Down After All?

When you are looking for a loan, you should have in mind the specific contexts in which a zero-down mortgage makes sense. There are currently two types of government-sponsored loans that allow you to buy a home without a down payment: USDA loans and VA loans.

Each loan has a very specific set of criteria you need to meet in order to qualify for a zero-down mortgage. If you are a veteran on the one hand, or if you are planning to buy a property in a qualified rural area — a one family residence not a working farm — then you should certainly be interested in doing this research.

Step Six: The Two “Pre” Letters

When you have the money to make your down payment, when you are sure that you budget will allow you to make monthly payments, you are ready to seek a pre-qualified letter from a lender, or from each of several lenders.

A pre-qualified letter states the amount of a mortgage that the lender is willing to give you based on the information you have provided. You can use this letter when shopping for a home. It does not mean that the lender has guaranteed you anything. But it is helpful: it can show that you are a serious buyer, not just someone who likes to go to open houses as social events.

If you do get a pre-qualification letter, though, consider it a stopgap, until you can provide fuller documentation to a lender and get a pre-approval letter. It is the pre-approval letter that makes you a party with whom sellers will want to deal.

Happy hunting!