5 Strategies for Saving for a Down Payment as a Renter
- Author: Mary Singleton
- Posted: 2024-10-08
Buying a home after renting one for a certain period is a big step that can become overwhelming. You will need to decide the kind of house you want, consider your current finances, and establish the best strategies to start saving for your dream home. Whether you've started planning to buy a house, or have been doing it for a while, here are five tips to guide you on saving for a down payment while renting.
1. Work on Your Debt-to-Income-Ratio
Before any financial institution lends you a mortgage, they will first check your debt-to-income ratio. They calculate your DTI by dividing your minimum debt payments by your monthly pre-tax income. Mortgage lenders are more confident to lend you money if you have less debt and vice versa. Therefore, you should try and have a DTI of less than 50% to have a better chance of qualifying for the mortgage loan you need. However, you can borrow federal loans with a DTI of slightly more than 50%.
2. Increase Your Credit Score
Addressing your debt will include eliminating credit card debt and increasing your credit rating. Most financial institutions require a minimum FICO score of 620, but you can get a mortgage loan from federal lenders with a lower score. Before approving your home loan, lenders will check your credit history and credit rating.
You can improve your credit score in various ways. For example, you can make frequent small payments on your periodic credit card bills to reduce your monthly payments. Additionally, you can set automatic payments of bills to ensure you clear them on time. While renting a house, you can easily increase your credit rating by getting credit for timely rent payments.
3. Pause Saving for Retirement
Since you can spend your whole life saving for retirement, it would be a great idea to put it on hold while saving for a down payment for your dream home. Even though that doesn't mean that retirement savings are not essential, they will help you channel your cash towards buying a home. It will help you meet your savings goals without affecting your spending habits, own a home, and resume saving for retirement later on.
Financial and housing experts advise you to factor in more than just the mortgage amount when planning to buy a home. It would be best to consider the house-buying principal amount, the mortgage interest, property taxes, and homeowners' insurance, among other expenses. Additionally, living in a small apartment will pay higher utility bills after moving to a bigger house.
4. Open a Down Payment Savings Account
You should have a low-risk savings account where you'll save money for buying a home. Then, factor in the home-buying expenses and the amount you can comfortably save for the home to get an idea of the time you'll need to achieve your down payment goal.
Divide the money you plan to save by the months you have to raise it to know how much you'll save each month. If you need a short period, such as two or three years, to save the down payment money, it would be best to open a money market or savings account.
If you plan to save for an extended duration, you can choose another type of investment. Consider automating the savings such that your bank deducts money from your salary account to the monthly down payment saving account. That helps you to avoid spending the planned savings on other things.
5. Reduce Your Expenses and Increase Your Income
Look for a cheaper apartment and relocate. You can then put the money saved from the monthly rent in the home buying savings account and repay debts and credit card expenses. Even though moving to a smaller and cheaper apartment will make you compromise on some amenities for a short period, you will improve your chances of achieving your home-buying goal.
You can get a roommate as a way of spending less on the rented apartment to raise more cash for buying the home. You may also pause paying some subscriptions, such as gym membership, and increase your income through working extra shifts and getting a second job, among other ways.
When planning to own a home, the five strategies above will make it easier for you to transition from a renter to a homeowner. Address your debt, increase your credit rating, pause saving for retirement, open a savings account and reduce your expenses to achieve your home ownership goal.
