What You’ll Learn
What impact a down payment has on your homebuying budget
How your priorities and expenses change the affordability of a mortgage
Simple tactics to plan for a home and jumpstart your savings
So you want to buy a house but feel limited by the amount of cash you have on-hand. If cracking open that piggy bank doesn’t yield impressive returns, don’t worry—there are flexible lending options that fit a variety of homebuying budgets. You can save up for a home sooner than you think with a bit of strategic planning.
Ask the right questions about affordability
Let’s start with a crash course in understanding affordability and the cost of a mortgage. When it comes to buying a home, the listing price doesn’t tell the full story. Instead, your budget should be based on the short-term and long-term costs of homeownership. Short-term costs are the upfront expenses of buying a house and getting a mortgage, such as your down payment, closing costs, and moving fees; most homebuyers rely on their savings to cover those one-time expenses. Long-term costs are recurring, like the mortgage payments you’ll make over the life of your loan. These ongoing payments are primarily determined by your loan principal, interest rate, taxes, and insurance.
How much you can afford to pay upfront depends on your savings, but how much you can afford to pay every month depends on your other known expenses and lifestyle preferences. For example, if you’re planning to grow your family, buy a new car, or prioritize travel, you need to examine the cost of your mortgage and make sure that monthly mortgage payment won’t eat into other priorities or create financial strain. Take both cost perspectives into account when setting savings goals and use our affordability calculator to see a high-level homebuying budget based on your down payment amount. Make adjustments in the calculator to see how increasing your savings can impact your mortgage payment and loan amount.
Find a down payment that works for you
A down payment is the amount you pay upfront to purchase a home, with the remainder funded through a mortgage lender. If you’re thinking about buying a home, the down payment might seem like the biggest hurdle, but you don’t need a ton of savings to get approved for a loan. While it’s true that paying 20% or more upfront can qualify you for lower interest rates and help you avoid additional charges like private mortgage insurance (PMI), you can still become a homeowner with as little as 3% down on certain types of loans. In fact, data shows that credit is a stronger indicator of default risk than down payment size. Translation? Good credit can offset a modest amount of savings and help you get approved for a loan.
Figuring out how much you should put down on a house is a bit of a balancing act. Overextending on a big down payment that completely wipes out your savings can be financially risky, but low-balling your down payment can score you less favorable terms from a lender and might signal to sellers that you’re not a serious contender—particularly in a competitive buying environment. Ultimately, finding that Goldilocks down payment amount (not too big, not too small) will depend on your personal priorities, your budget, and your homebuying goals. And remember, different types of loans come with different pros and cons. Some government-backed loans may not charge PMI or even require a down payment, so explore your options.
10 strategies to start saving for a house
Figure out your ideal savings target. Understanding your current savings will give you a clearer picture of the interest rates and loan terms you qualify for, and help you see how different down payment amounts can impact the cost of your mortgage. A bigger down payment will reduce your principal and may help you lock in more favorable interest rates, resulting in lower monthly payments and lower interest costs over the life of your loan. On the other hand, you might decide that a smaller down payment is preferable because it means you can buy a home sooner and/or you’ll have cash left over for other expenses. Once you determine the down payment amount that will give you the most comfortable loan terms, you’ll have a benchmark to work toward.
Understand your spending habits to see where your money is going. You can’t really do anything to improve your savings until you have a proper look at what’s coming in and going out of your pocket. Get familiar with your bank statements—credit cards and checking accounts—to make sure you have a complete picture. From there, organize the costs based on how essential they are and get ready to trim the fat.
Decide where you can realistically but effectively cut back. Create a monthly savings goal and be specific with the dollar amount. This number will be determined by how quickly you want to save. If you want to buy a house sooner rather than later, set more ambitious savings milestones for yourself. Start by eliminating frivolous expenses or expenses you don’t get as much value from, like subscriptions or memberships you don’t use. The little things add up!
Prioritize your savings, pick goals, and stick to them. Set yourself up for success with proper planning and guardrails. If you know you like to shop online, for example, curb your daily scrolling habits by unsubscribing from tempting email promos or unfollowing a few brands on social media. If takeout food is your weakness, take delivery apps off your phone. Creating boundaries is an effective way to curb habits.
Set it and forget it. If you’re not sure you have the discipline to manually deliver on your goals, automate as much as possible. Diverting money from your paycheck every month into a savings account is a great way to set-it-and-forget-it. If you don’t see it, you’re less likely to spend it.
Reduce your cost of living. If you don’t want to nickel-and-dime your way to that savings goal, consider taking more extreme action. Sell your car. Get a roommate to share living expenses with. Or better yet, move into a cheaper apartment and pocket the extra cash that comes with frugal living. The bigger the action, the bigger the impact.
Increase your income. On top of reducing the amount of money you spend, try to amplify the amount of money you earn. Prioritize career growth by asking for a raise or planning your next career move into a higher paying role. You can also freelance or pick up a side hustle to earn extra cash. The dual impact of bigger earnings and smaller spending will help you reach your goals faster.
Improve your debt-to-income ratio. Your debt-to-income ratio (DTI) is a key indicator of your potential risk as a borrower, and a high DTI can ruin your chance of getting approved for a loan. Pay down your credit cards or other high-interest sources of debt to improve your DTI, and avoid making large purchases on credit in the months leading up to buying your home.
Work on building up your credit score. Credit scores are another data point that lenders use to evaluate your potential risk as a borrower. A low credit score indicates that you’ve had issues effectively managing debt in the past. To boost your score, try to be diligent about making timely payments on all your lines of credit, and if possible, work toward lowering your outstanding balance to 30% or less of the available limit.
Accept help if it’s available. In the immortal words of Regis Philbin, “would you like to phone a friend?” Some mortgages allow homeowners to use gifts and contributions from family members to boost their down payment.
While it’s true that buying a house is a significant investment, there are affordable home financing options that fit a variety of budgets and savings brackets. Using the tools on our website you can explore down payment amounts that work for you now, or just get a better picture of how much you should be putting away each month. Getting pre-approved with Better Mortgage is completely free and doesn’t impact your credit score—why not find out how much you can already afford?