How to Save For a House

How do you buy a house? 

The question may sound obvious and complicated at the same time. The way you buy a house may save you thousands of dollars buying the same property.

Why pay more than what you have to? Why invest too much today when you could use it to invest money somewhere else? Most people see their dream home as the biggest investment of their lives. Whether it’s profitable or not is debatable, but who wants to buy the best property only to end up broke?

Before you buy, learn what you want, where to look, how to lower the price, and how to save money long-term.

How Much Should You Save to Buy a Home?

We wish it were as easy as paying the asking price. But when considering the best financial practices (risk management), costs can reach five figures.

Buying it is the easy part. 

  • How will you be able to pay every month if you spend everything on the purchase?
  • Do you have enough emergency funds for unexpected events? Should you get home insurance?
  • Is the property worth the price the owner chose for the sale?
  • How do you protect your money if everything goes wrong?
  • Should you take your best current listing or keep looking?

Without these considerations, we can guarantee your first house purchase will cost more than estimated. If you don’t have stable income streams to back up, it can put you in the red the first month. Imagine living in a mansion while eating ramen noodles every day.

We’re going to show three factors that include along with the down payment. But since buyers are optimistic about their expenses, add 10-30% as your error margin. If you still have enough money after these costs, go ahead with the purchase.

#1 The house payment

Often seen as the largest purchase you can make, financing a house also means carrying huge amounts of debt for decades. If you have no intention of selling this property later, paying more upfront will save you interest and years of financial stress.

Mortgages look safe, assuming you live in a stable economy, and your income steadily increases. But you might go through multiple crises before making more money. Will you be able to pay your mortgage with a single income stream in an uncertain economy?

Besides, paying off a mortgage comes with its own risks as well.

Pay the whole amount in cash right now and never worry about interest or debt. If that’s all you have, you can take a reasonable loan instead so that you can invest your money somewhere else. Owning a house doesn’t pay the bills. It creates them.

#2 Closing costs

If you can’t pay the full amount, your best option is the traditional mortgage. Your lender needs a system where you pay the amount every month for years until paying off, and it must adjust depending on what debt you have left.

In other words, you pay closing fees to secure the transaction, which may be:

  • Escrow fees
  • Mortgage insurance
  • Loan application fee
  • Appraisal
  • Credit report
  • Home inspections
  • Owner Policy Title Insurance
  • Prepaid interest
  • Homeowner insurance

Of course, we don’t expect you to be familiar with all these terms. To keep on track with everything, you may hire an attorney and review the documents (include it as an extra fee). The list goes on.

On average, closing costs increase the price by 2-5%, which isn’t ideal when you’re buying on a tight budget. And we haven’t got into prepaid expenses yet!

#3 Prepaid expenses

You technically don’t spend more in this category. You just pay upfront what you would pay later anyway. If you don’t have these reserves, lenders may consider you as a risky borrower and reject the loan application.

If your finances look objectively bad and you find a lender who is more than willing to take you as their client, then proceed with caution. A potential lending scam might be unfolding and you are the main actor.

Whether they require a loan or not, it’s never a good idea to buy a house without extra funds. Here’s what they expect you to cover:

  • Real estate taxes
  • Homeowner’s insurance
  • Utilities
  • Cash reserves

The lender will put some of these charges in escrow for the first monthly payments. Instead of an expense, look at it as money you’ll spend anyway but needs to be available today.

For example, the owner may have covered utility bills for the whole year. If you buy the home in April, you’ll need to cover the remaining eight months (they can pay in advance for 2-12 months).

You rarely think of these payments since your mortgage lender takes care of them instead. They will increase your costs whether you’re responsible directly or not.

Your biggest numbers would be real estate taxes and cash reserves. Utility bills, although numerous, cost under $1000 per month for standard properties.

So that the lender can approve your loan, he needs to verify that you have enough cash reserves. You don’t need to deposit the additional amount, but you may not get the mortgage without it. How much? About two months of expenses covered, maybe more based on credit score. These include first-year interest, taxes, and home insurance.

Here a general estimation. For a 20% down payment, it may cost you 7-10% more to close the property. In the case of a 10% down payment for a 200K house, closing costs may estimate up to 30K.

After you make all these advance payments, the monthly rate reduces significantly. If you find yourself in trouble keeping with the expenses (but you closed with cash reserves), you can get back on track without falling for debt.

How to Pay Less for the Best Home

What would you like your house to look like? It may cost less than you think. You see all those listings and think of them as your only choice. But the asking price rarely has to do with the exact sum to pay.

For the same place, you can get a different price depending on what you say, what you need, how you pay, who you are, and who is selling it. If you can remove the owner’s objections, you’ll be closer to getting a fair price.

#1 What do you want?

When having too many options (or too little), we tend to compare listings to choose the best. But the best of the group may have nothing to do with what you want. 

Some recommend looking for houses based on your income level and what you can afford. Why not define your ideal home first and then look for the most resembling listings?

For every item of your list, assign a priority. Your dream home may not be in your budget, but you can still trade off the non-essentials and get close to that concept. 

You’ll be happier buying what you need rather than extra features, which you’ll never get much value from. Do you really need more space, another bedroom, or a third bathroom?

It doesn’t matter what realtor or directories you use until you realize what you need.

#2 Be flexible

At the same time, expect your purchase to be less than ideal. You can’t find the exact property you described, and if you do, it probably costs more than expected.

Not all problems have the same weight, though. It’s okay to forgive aesthetics and decoration, for example. If it’s easily fixable, don’t think too hard about it and buy. It may be 10-20% over your budget and still be worth it.

If, however, you find structural problems, or it doesn’t meet your essential requirements, keep looking. If the problem is too big to solve it, you’ll have to deal with it for years (if you move again).

#3 Work with real estate agents

If you try to save for a house, it’s normal to undervalue realtors. Why let others do what you can do yourself? Today’s real estate apps are available for everyone.

The problem is, you see the same offers as everyone else does. If there’s something good, they’ve already taken it before you even contact the owner. You still find good deals, but not the best ones.

If you have high standards and style, many people will be looking for the same property you want. But you can outcompete buyers who only search online by hiring a realtor.

  • No more guesswork: Immediately know what the market price range is.
  • Stop wasting time: Realtors find the latest listings through an MLS (multiple listing service), filtering out duplicates, fake, and outdated promotions.
  • Lower the price: Let a professional negotiate and win the seller’s side.

Without realtors, you don’t have much choice other than whatever the owner offers you: take it or leave it.

#4 Make a bigger down payment

Sellers may be more open with negotiations, depending on the immediate value they get. Lenders may like smaller down payments because of higher interest rates. But if you picked the wrong borrower, you may end up trapped with a person who can’t keep up with their payments.

There’s no right answer: some recommend 3.5% while others say 20% for the down payment. What’s clear is that the more you pay upfront, the less you need to pay later.

The ideal scenario is paying it 100% in cash. Since you probably can’t do that yet, just take the traditional 15-year mortgage with a 20% downpayment (if you’re unsure of what plan to choose).

#5 Get a better credit score

It’s no secret than higher scores mean lower interest rates. A responsible buyer almost guarantees the lender will get their money back. Because you present less risk for them, they can offer more flexible rates.

No matter how low it gets, lenders still charge more the first year to cover most of the interest.

Make sure you can afford the loan you take regardless of your credit score or interest rate. If you’ve been paying for years and find yourself unable to keep up, think very cautiously about refinancing. It may rescue you from debt at the cost of paying thousands in interest years later.

Aside from some exceptions, it doesn’t take long to build decent credit. Follow this guide to learn how to fix your credit score in a few months (sometimes weeks).

#6 Negotiate the price

For most people, buying a home will be the biggest purchase decision they will make in their lives. If everything is negotiable, why not ask for the best deal? If you don’t ask, you don’t get.

But lenders expect buyers to look for the best prices. They won’t offer those unless you ask the right way, and they can benefit too.

  • A high credit score is your fastest way to position as a valuable borrower. Lenders want to lend to those who are more likely to pay them back.
  • Get approved for a mortgage before you contact the homeowner. They may offer a better price if you already got the funds, especially when choosing the 20% down payment.
  • Negotiate based on property value, not the asking price. You can get a lower offer when negotiating after inspections, or when it’s beyond the market average. Realtors will show you the price range and what offers are reasonable.
  • Don’t be picky. Allow 5-10% of margin respect from your ideal terms. The seller wants to win too, and good properties sell fast. Don’t obsess about negotiating a couple thousand. If you want to move fast, make your best offer from the beginning. When the property prices are below the market average, you’re unlikely to get a better offer.

How To Save Money Long Term

Did you think buying the house was all? If you don’t plan for future costs, you may quickly fall into debt.

On average, realtors recommend two to six months of living expenses as your emergency fund (depending on how old is the property). Aside from unexpected payments, lenders will require higher rates the first year to secure the loan.

The following tips don’t necessarily save you money today. But when compared over the years, they can make a difference worth thousands of dollars.

#1 Only buy if you plan to stay for a long time

For example, you may want to buy your dream home and keep it for generations. Why not accept those long-term expenses and save money today?

They don’t just cost money. You need to use the house in order to get its value. If you need to sell a house bought a few years ago, you’ll still find ways to sell it profitably. But because of those big upfront payments, you didn’t get the best value from it.

If you’re unsure about how long you’ll stay, look for low-cost essentials instead. A budget-friendly, practical property means more flexibility and savings so that you can find your dream home later.

#2 Inspection services

Let’s face it: if an inspection turns positive, it still doesn’t prevent unexpected expenses. Something you didn’t plan will inevitably come up. Learn to accept the property flaws while doing everything you can to minimize them.

You don’t know what you’re buying until you’re living there. If the seller owns the property as an investment, they may neither know much. How will they know what the lifestyle looks like when they never lived there?

Paying hundreds for an inspection saves you hundreds of thousands you’d have spent on the wrong home. 

Although clients expect the outcome to be positive, inspections may bring bad news. You could buy the house despite the recommendations, but be ready for more “unexpected” costs later. Why devote so much to a bad deal when there are many better options available?

#3 Pick the right location

When talking about buying a house, we tend to focus too much on the price. We may forget about the critical role of our income, which is the reason we can buy in the first place. Whether you have a job or run a business, making money takes time.

Living far from the city may get you lower prices, but you’ll spend more time and money on transportation. Hours of commuting will cost you earning time.

No matter how many pre-payments you cover when closing, you still need money. Your house is often a liability more than an investment. You may have spent a lot, but expenses only start after you bought the property.

#4 Energy efficiency

If you’re going to spend over six figures in your house, why should you be afraid of spending a few extra hundred bucks? That’s what most appliances are going to cost you. Energy efficiency can save thousands of dollars over the years. Buy some LEDs or choose better dishwashers, water heaters, ACs, washing machines.

You don’t need a new house to do it. You can buy them now and lower your bill. Move them when you buy a new home.

If you buy a home and plan to sell it years later, some energy savings may not be worth that much. These savings only become visible after a long time.

#5 Security system

Although a home suggests a sense of security, it takes responsibility to keep it like any other asset. If anything goes wrong (e.g., burglary), it will cost thousands of dollars, depending on how many valuables you keep. The average household loses around $2800.

What costs the most is time and earning ability. Instead of increasing your income, you now need to spend time recovering from the damages. And because you’re too worried about the recent breakout, you can’t focus at work. You’ll need to spend in security anyway, or the scene may repeat.

If this sounds too paranoid to you, try the minimum viable option: dissuasion. Programmed lighting can simulate activity when you’re not at home. Fake alarm signs and cameras will make them think twice. Dogs help too, and they can bring joy to your family.

#6 Increase the house value

If you’re looking to save for a house, you’re likely won’t take the high-end properties. You want the essentials and pay the least.

When buying undervalued homes, the least for what you can sell them is the average price. Rather than betting on the economy, you can raise its value with renovations.

These could earn back 50-60% ROI, assuming the property has no structural problems and hasn’t gone through renovations recently. 

On a limited budget, your best investments are the kitchen, bathrooms, and the overall energy system.

Wrapping Up

Lump-sum or traditional mortgage? The first one minimizes debt, but the other may offer tax benefits and payment flexibility. If you can’t pay in full, remember to consider the closing costs.

The most affordable way to pay for a house today may be the most expensive tomorrow. See if you can switch plans later, or start with higher percentages to avoid paying too much interest. 

Working with realtors helps to get more options and negotiate, which is why almost 90% of buyers work with one. And whenever you’re closing the deal, it’s worth paying a fee to secure payments with escrow. 

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