People standing in front of home with interest to purchase

How to save for your dream home and Determine What You Can Afford

Prepare for your next home purchase with a road map that sets you up for success.

Consider Your Goals

If you are looking for a home, a healthy down payment helps you pay less in the long run.

Saving for a down payment might require you to make specific changes to your lifestyle. It might mean changing your spending habits or increasing your income. In each situation though, saving for a home requires a degree of determination.

To understand how to save and prepare for a mortgage, you need first to assess your financial situation. Being truthfully ready means you have a plan. It also means you know what your budget is and if it’s the right time to buy.

Talk Confidentially About Your Unique Situation With One of Our
Mortgage Consultants

Buy a House Refinance

A general rule of thumb is that your mortgage payment shouldn’t be more than 28% of your monthly income, and you shouldn’t be paying more than 36% of your monthly income towards your total debt. A mortgage shouldn’t overextend your budget and prevent you from saving money. For some of us, saving for a mortgage takes months, and for others it takes years. Depending on the circumstance, each of us will take a different journey to homeownership.

Everyone has an opportunity for homeownership. Even those of us with lower incomes have a chance if we accept a little assistance. Before we look into different mortgage options, we need to understand where we sit on the spectrum.

Give Yourself a Road Map and AssessYour Financial Situation

To prepare for a home loan, you need to understand a few different factors about your financial situation. In addition to having a suitable down payment, you must know your credit score and Debt-to-Income Ratio (DTI).

Assessing your situation means developing a way to track your spending and sticking with it. It also means that you will need to understand precisely how much you make and how much you spend monthly. It’s important to know that if you take on a mortgage, you are still going to need to save, as mentioned above. You don’t want a mortgage to stretch your finances too thin. Understanding the exact costs associated with a mortgage will help you determine how much you can save annually and how long it will take to save for the down payment.

Calculate how much house you can afford and your Down Payment

In addition to your down payment, there are other factors that affect your mortgage payment, so it’s impossible to know the exact cost until you see your loan estimate. However, a mortgage calculator gives you a great general idea that will help you set your initial savings goal. To develop a plan, you’ll need to figure out average housing costs in the areas where you are interested in moving. Generally, lenders advise you have 20% prepared for a down payment. Without a strong down payment, you will pay more over the lifetime of your loan.

Here is where you need to decide on your goal. Although 20% is a recommended goal, it is not always necessary. Calculate your down payment and monthly payments using a mortgage calculator. A calculator can help you determine what kind of expense a mortgage payment could be on your budget. Using the 28% rule, you can estimate what type of mortgage payment you can realistically afford.

Calculate Your Potential
Monthly Payments

Buy a House Refinance

Determine Your Budget

Creating a budget will help you understand how much money you’re spending and what you’re spending it on. Thankfully, understanding your spending habits is easier than ever. Your bank probably offers a program that is already tracking your spending. Not to mention, there are a paralyzing number of budgeting apps you have access to through your phone. You may want to consider Mint, Pocket Guard, and Simple, to name a few.

An excellent way to understand what your budget should look like is by using the 50/30/20 rule developed by Balance. This rule suggests you use 50% of your budget for needs, 30% of your budget for wants, and 20% for savings. As you begin calculating each of your budget expenses, it may be a good idea to overestimate your budget items. It’s always better to have money left over at the end of the month, and overestimating your expenses will give you that cushion.

Many different platforms can help you create a budget. If you are taking a DYI approach, you may consider creating a budget in Google Sheets or Excel. Your bank might also have a great way to track and budget your spending.

Learn About
Your Best Options

Buy a House Refinance

Here is a list of some common Categories For Your Budget:

  • Rent or Mortgage Payment
  • Insurance
  • Taxes
  • Repairs

  • Internet and Cable (if you still rock that satellite dish)
  • Electricity
  • Water/Sewage
  • Gas
  • Cell Phone Bill

  • Doctor Visits
  • Prescriptions
  • Health Insurance

  • Groceries
  • Eating Out

  • Beauty/Personal Hygiene
  • Laundry
  • New Clothes
  • Salons/Hair Cuts
  • Clothing

  • Movies
  • Concerts/Theatres/Symphonies
  • “Going Out”

  • Your Personal Savings
  • Low Risk Bonds
  • 401K and Retirement

Knowing which expenses are consistent and which fluctuate is also helpful. There may be variable costs that you can apply to your savings at the end of the month, or you may be overspending in a specific area.

Over-all there are some great benefits to creating a budget. By getting a better understanding of your finances, you can establish expectations for yourself. You are preparing to make a significant investment, so it’s best to make an educated decision. Since you’re also thinking about securing a mortgage, some other variables might help you understand your financial situation better.

Know Your Credit Score

If you don’t know your credit score you can contact one of the three major credit reporting agencies.

In order to understand your credit score a little deeper, we recommend you contact a mortgage consultant today. There are many different factors that affect your score. Some of these factors include payment history, percentage of credit used, type of credit, age of credit history, amount of new credit, and any hard inquiries.

Credit scores (also referred to as FICO) can range from 300-850. A good score could range from 650-850. Anything lower, and you may not qualify for the best interest rate.

Know Your Debt to Income (DTI)

To understand your DTI, you need to know what your monthly income is and compare it against your monthly debt obligations. These include car payments, student loans, credit cards, etc.

Calculating the debt to income ratio is easy. Take your total monthly debt and divide it by your gross monthly income. For example, if you made $3,000 a month and you paid $500 towards your monthly debt, your calculation would look like this 3,000/500. In this example, your DTI would be 16 percent.

In general, you want to have a DTI that is below 43%.  Anything higher and it’s going to be difficult to qualify for a mortgage.  Ideally, you want your ratio below 36 percent.

Develop a Savings Plan

At this point, your previous calculations will come in handy because you need to define your goal clearly. You can use your budget along with your mortgage calculations to discover precisely how much you need to save.

Knowing how much you are able to save is a judgment call. You have the numbers in front of you, but understanding what is realistic is another story. You can start by setting the minimum savings goal you want to hit at the end of each month. Then you can estimate how your savings account will grow over time.

If there is wiggle room in your budget, you may want to settle on an amount that fluctuates. Depending on what you are willing to sacrifice, you may be able to save for your new home even faster.

Although a significant savings account is one of the best ways to approve funding, it doesn’t necessarily mean you are mortgage ready. The rest of this guide will give you some ideas and tips for becoming mortgage ready, including improving your credit score and lowering your DTI. The more qualified you become, the better chances you have of securing the best rate.

Saving For a House

At this point, if you haven’t already, set up a savings account with your bank.

It’s time to put that plan into action. Beware, there are sometimes regulations with certain types of accounts, so ask about the specifics of your new account.

You can help your savings account grow even faster in a couple different ways. Look into opportunities to earn extra income, which can be easier than you think. Also, it might be a good idea to begin cutting expenses by determining the difference between the things you want versus the things you need.

How to Earn Money Fast

There are several methods of earning extra income. Depending on the amount of time you can devote, you could pull in thousands of additional revenue each month.

You could be a delivery driver or work part-time with companies such as Uber or Lyft. There are even some online platforms that can help you earn money by dog walking, babysitting, or house cleaning. These platforms also allow you to have flexibility with your schedule.

Not only that, but you could also get a part-time job at a restaurant or look into working at a grocery store. There are many great ideas and opportunities throughout your city. You only need to be willing to apply. The truth is these few suggestions are only the beginning. If you don’t like these ideas, there are plenty more in this Entrepreneur Article. And keep in mind, it’s a temporary means to your end goal of homeownership. And it will be worth it!

How to Remove Unnecessary Expenses

Although you might be able to convince yourself otherwise, you can consider anything unnecessary if it doesn’t fulfill some basic need.

If you take the time to trim down some of your expenses, you will be able to reach the finishing line of your goal much faster.

To set yourself up for success. We recommend you remove obstacles by avoiding spaces where you know you will be tempted to spend recklessly. For example, limit your social outings to weekends, or find free alternatives for you and your friends to try.

Focusing on the outcome over the moment can also help you reduce your expenses. Waiting is worth it. If you have heard about the Marshmallow experiment, you know it has shown a correlation between delayed gratification and success. It’s not a predetermined trait. If you can focus on the reward from your sacrifice, you might be able to suppress the itch.

Finally, it may be a good idea to find a community that could aid you on your journey. Using a supportive community could help you stay accountable.

Finding Support

Sometimes to stay the course, you need support.

If you need support, you can look for it in a few different places. You may want to use your family and friends for help. These are people who you already trust who care for you. They can help you stay motivated to save.

Another option would be looking at other people online to get the support you need. In the beginning, saving is going to seem more difficult, but it becomes easier the closer you get to your goal. Even if you are not necessarily looking for support, it doesn’t hurt to hear other success stories.

Use Investing and Personal Finance Communities

Nowadays, there are so many different types of blogs online. By investing in a personal finance community, you can not only gain a wealth of knowledge, but you can keep yourself accountable.

These blogs can give you expert advice about personal finance, mortgage readiness, and investing strategies. You can learn from these different sources if you are interested in growing your finances more over the long term. NerdWalletInvestopediaBankrate, and Dave Ramsey are all great sources for you to begin your journey. Our blog is also a great place to start learning more about your personal finance journey.

There are many communities online that you can connect with as well. It might be a good idea to join a Facebook group or create one of your own. Using social media, you can gain motivation from hearing other stories and maybe even sharing your own.

Goal Setting

To achieve your goals, you need to be serious, and you need to set up an action plan. You don’t want to find yourself off course.

We can’t change all at once, and your savings isn’t going to grow overnight. While it’s essential to keep the future in mind, you don’t have to get everything done at once. Research from the American Psychological Association or APA shows that back-to-back decisions test your self-control and deplete your willpower. That’s why a shopping mall or the Casino might be a place you should avoid. Don’t let yourself be distracted.

Building up good habits will make it easier for you to continue those behaviors. That is why one failure can jeopardize your entire plan. So focus on making each moment successful as well as the success in front of you.

Improving Your Qualifications to Get the Best Rate

Your down payment isn’t the only factor that makes a difference in your application. Other factors like your credit score and DTI will factor in as well.

If you are ready for a mortgage and prepared to achieve the dream of homeownership, you may need to improve some of your other qualifying factors. By developing these factors, you not only improve your chances of acceptance, but you can also lower the cost of the loan. You can follow these tips to help you better your credit score and your DTI.

Boost Your Credit

A derogatory credit event can be on your report for many years. So boosting your credit score can take anywhere from a few months to two years. You can increase your credit score by paying off debt and making your payments on time. Also, be sure to keep your balances low so you aren’t overwhelmed by debt. You don’t want to get rid of your credit altogether though, just make sure to keep the balances low and pay them off on time each month.

Lower Your Debt to Income Ratio

Unlike your credit score, instead of raising your DTI, you want to lower it. Decreasing your debt to income ratio is an improvement, and this act will make you even more prepared for a mortgage. In order to get approved for a mortgage, your DTI needs to be below 43%. To lower your DTI, you need to pay off your debts. This might mean allocating more of your budget to help you pay off debt faster. You can also improve your income, and this will decrease your debt to income ratio.

The Typical Down Payment On A House

There is no such thing as a typical down payment.

If you are interested in hurrying up the process, you do have options. Most people will need to work towards getting qualified. Percentages of down payments can range between 0% down and 20% down. You can reduce some of your expenses on the cost of a home by Negotiating certain costs. You can avoid Mortgage Insurance if you put 20% down, so it is up to you to know how urgently you need to be in a home.

Programs That Provide 100% Funding

There are many options if you are don’t have a large down payment saved up yet.

It’s worth noting that several programs will allow you to apply for a home loan with less than 20% down. There is no such thing as a typical down payment, so you might want to consider taking advantage of a 0% down option. Of course, you would only do this under specific conditions. Depending on your circumstances, you may be able to take advantage of a DPA Program, VA or USDA loan.


Decide On Your Options With Expert Guidance

Buy a House Refinance

Down Payment Assistance (DPA)

DPA Programs assist low to moderate-income homebuyers. DPA programs are typically offered by states or other local entities to help make the dream of homeownership a reality and create opportunities for families. There are DPA Programs available nationwide, so there is likely a program near you.

With some DPA Programs, you may need to attend a homebuyer course. As well, some income restrictions may apply. In general, Down Payment Assistance Programs can have excellent benefits. So for many potential homeowners, they are a great option.

Veterans Administration and the United States Department of Agriculture

VA and USDA allow for 0% down, have easier qualification standards, but also have some restrictions. Also, the credit qualifications for some of these loans can be less restrictive. The limits are that VA home loan is only available to Veterans and Active Military Members. USDA home loan is available for Rural properties.

Your Decisions Matter

Saving for a down payment is a tremendous task, and getting mortgage-ready can sometimes require sacrifice. You need first to be able to make a plan, which means making a budget. Then you can figure out the costs you will need for your home purchase and begin saving. With a completed budget and goal in mind, you will be able to see how long it will take you to get there. Sometimes saving will require determination and diligence, but nothing compares to the feeling of owning your home.

When you are ready, you can talk to a mortgage consultant to get pre-approved, find the right realtor, and decide what home you want to buy. Read the next guide about pre-approval to learn how you can begin the mortgage process.

Continue on Your Home Buying Journey

Once you have your budget and know how you will pay for the costs associated with your new home, continue to the next step in your Home Buying Journey, and learn all about pre-approval and why it’s one of the most critical steps towards buying your Dream Home.

Next Step: How to Get Pre-Approved