How to Save for a House on Any Salary

Financial experts share their top tips for getting into your dream home—no matter how much (or little) money you make.

Interested in buying a house, but convinced you'll never be able to afford it? You're not alone. Many Americans dream of—and struggle with—buying a home. In fact, according to a 2020 Accion survey of more than 6,000 Self Financial customers, 57 percent said their top financial goal was to buy a house.

Yet housing affordability is now harder for first time homebuyers, according to Castleigh Johnson, CEO and Founder of My Home Pathway and a financial inclusion advocate. So how do you navigate the challenges and expenses of the current housing market?

"Patience and persistence are aspects of the process that can pay off for homebuyers," Johnson says. "Even in a seller's market, there are opportunities that may present themselves where sellers want to exit a property fast and look for a reasonable offer, for example."

He also urges people to avoid falling for the 20 percent down payment myth, since there are programs that offer benefits to help you buy a home with less money.

In other words, there's hope you can afford a house someday, even if your current money situation isn't exactly where you want it. Here are four tips to help you get creative, leverage your resources, and build the right financial plan to buy your dream home.

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Improve your credit to potentially pay less.

While you can get some mortgages with bad credit, you'll likely pay higher interest rates than someone with excellent credit. A 1 percent difference in interest may not sound like much, but over a 30-year mortgage, it adds up.

For example, according to FICO, if you have a credit score between 620-639 and buy a $374,900 home on a 30-year mortgage, you could pay $479,496 in total interest. The same mortgage with a 760-850 credit score could reduce your interest to $343,524, meaning you save $136,272 in interest alone by having excellent credit.

"Credit scores and savings are critical components to the mortgage loan review process, and as an applicant, you want to put yourself in the best position to make it through the review process and get a low-risk rating so you get approved, and at a low interest rate," Johnson says.

Your credit score can also impact the size of your down payment.

With a Federal Housing Association (FHA) loan, a credit score between 500-579 means you pay a 10 percent down payment. For credit scores of 580 or higher, that down payment drops to 3.5 percent. For a home worth $374,900, that's the difference between $37,490 versus $13,121.50. Imagine how much faster you could buy a home if you skipped paying that $24,368 up front.

To get your credit mortgage-ready, start by pulling copies of your credit reports from at least six months before you plan to buy. That way, you have time to improve your credit if necessary. Depending on what you find in your reports, improving your credit may include disputing inaccurate information or paying down high credit card balances, for example.

If you don't have a credit report, it just means you don't have enough credit history to have a credit report or score yet, so you need to build credit before applying for a mortgage. You can do this by using tools such as credit builder loans or secured credit cards, which you can find online or via mobile app through Self Financial, or through some banks and credit unions.

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Check out special assistance programs.

Depending on your situation, there are programs and loans that offer reduced down payments, down payment assistance, and other benefits to make home buying more accessible. For example, FHA loans offer lower down payments for first-time homebuyers, while Veterans Affairs provides special options for active-duty and veteran service members.

Some states also offer reduced down payments and down payment assistance for Emergency Medical Service providers, police officers, and healthcare professionals. And the U.S. Department of Agriculture (USDA) provides special loan programs for eligible rural areas.

"These initiatives give people access to homeownership who might not otherwise be able to afford the financial hit and out-of-pocket costs that come with traditional mortgages," says financial behavior expert and journalist Stacey Tisdale. "Talk to your lender, and if it turns out you qualify for an FHA and a USDA loan, for example, compare fees and rates to determine what's best for you," she says.

There are hundreds more special home buying programs across the country. Find one in your area by visiting the U.S. Department of Housing and Urban Development search portal.

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Know how much house you can afford.

How much house you can afford isn't about how big a loan a bank will give you, but how the monthly payment fits your budget. While many lenders require that your total debt counts for less than 43 percent of your income, the bills they see on your credit reports don't reflect your full budget. They don't always see costs like utilities, food, transportation, or medical bills. They also don't factor in additional costs of owning a home, which may include closing costs, home repairs, utilities, homeowner's association fees, or property taxes.

Being aware of these costs is important so you don't become "house poor." Before signing a mortgage, test if the cost fits your budget by setting that money aside for a few months to see if it's doable. If the cost is equal to or less than your current monthly rent, chances are you're in good shape. Using financial services apps like Acorn can help you budget and save.

"A good rule is that you don't spend more than 30 percent of your after-tax income on housing expenses. That includes things like maintenance. That seems to be the threshold that helps people avoid financial stress from this part of their financial lives," Tisdale says.

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Focus on your goal and start saving more.

"Savings are typically used for down payment and closing costs, as well as an emergency buffer in case of unexpected expenses or change in life events that may arise. So having a nice savings total makes it easier for you to qualify for the mortgage, since lenders see you as less risky," Johnson says.

To start saving money for a house, set clear goals first, Tisdale explains.

"Goals provide you with the motivation to stick to a financial plan. They literally rewire your brain and help you make better choices. Think about what your ideal life looks like. Where does a house fit in? Where is it? How much does it cost? Be as specific as possible," she says.

You are nearly twice as likely to achieve your goals if you write them down and tell someone to hold you accountable, she continues.

There are two ways to save money for your homeownership goals—cut your spending or earn more. To start cutting back, look at everything you spent money on in the last 30 days. Then go line by line to separate your needs, like housing or food, from your wants, like extra clothes or eating out. Cut back on the wants.

From now until you're lounging happily at your new home, ask yourself, Is this purchase necessary? Does it provide me lasting joy or help me achieve my dream of homeownership? If the answer is no, skip the expense and stay focused on your goal.

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