Owning a home is the American dream. A home is also one of the biggest purchases most Americans will ever make. The biggest hurdle is usually saving up for the down payment while paying rent. It’s difficult, but not impossible. Here are some tips to save for a house while renting.
Tips for Saving to Buy a House While Renting
Tip #1: Rent to Own
Renting with an option to buy can be a great opportunity for homebuyers who need more time to save up for a down payment or increase their credit score. Rent to own is an agreement that allows you to pay “option money” that grants you the option to buy the house after a designated time frame, and rent it in the meantime.
Rent to own has several benefits beyond giving you time to save for a down payment. First, it grants you the opportunity to live in the house before you buy it, so you don’t encounter the cost or hassle of moving when you’re ready to buy. It also gives you the option to buy the house without having the obligation to buy the house, though the option money is usually nonrefundable. Additionally, you can negotiate with the seller and possibly work out a way to have some of your monthly rent count toward the down payment.
Tip #2: Increase Your Credit Score
Increasing your credit score can have a major impact on your ability to buy a house. While this tip doesn’t directly contribute to your down payment, it does contribute to your borrowing ability. By increasing your credit score, you may qualify for a lower interest rate, which can save you tens of thousands of dollars in interest costs. It also opens up your opportunities for borrowing since lenders may be willing to accept a lower down payment. A higher credit score shows lenders you are less of a risk.
Your FICO score is the credit score most lenders will use to determine your creditworthiness. FICO scores are calculated based on payment history, credit usage, length of credit history, new credit, and credit mix.
- Payment history indicates how well you regularly make on-time payments. Therefore, be sure to make payments on time for all debts, even if you can only afford the minimum payment.
- Credit usage shows how much credit you use compared to how much is available to you. Try to keep your credit usage to 30% of your limit or less to show you are not at risk for defaulting. You can also request higher credit limits if you are disciplined enough not to use more.
- Length of credit history indicates how long your credit accounts have been active. Longer credit histories increase your credit score.
- New credit refers to accounts recently opened, so be careful not to apply for too many credit cards or loans all at once or it could hurt your credit score.
- Credit mix indicates the different types of credit you have such as credit cards, auto loans, and mortgages. Having more of a mix helps to increase your score.
Find out how 101 Financial can help you increase your credit score.
Tip #3: Pay off Debt
Paying down debt such as credit cards and student loans can free up significant amounts of cash that you can put toward a down payment. It also has the added bonus of increasing your credit score and reducing your debt-to-income ratio (DTI), which makes lenders more likely to give you a loan.
Tip #4: Budget
The general rule of thumb is to budget 30% of your net income for housing. Use this figure to help you determine if you are paying too much in rent and if you need to cut costs. You can also use this figure to help you calculate what monthly mortgage payment you can afford.
Budgeting also means carefully managing your other expenses. Find ways to cut back on little costs, such as changing to energy-efficient bulbs to reduce utility costs, and put the money you’ve saved toward a down payment. If you create a separate savings account for your down payment, you can watch the little savings add up quickly.
Tip #5: Reduce Interest Costs
Interest can really hurt your cash flow and negatively affect your ability to save up for a down payment. Credit cards are especially notorious for having high interest rates. Not only that, but credit card interest is compounded, which means you pay interest on interest. Look for ways to cut down on interest costs, such as tackling your highest-interest credit cards first, or by learning more about using debt to your advantage.
Find out how 101 Financial can teach you how to save thousands of dollars in interest.
Tip #6: Reduce Rent Expenses
There are many ways to cut down on rent costs so you can put the money you save toward a down payment for a house. First and foremost, live within your means. While you’re trying to save up, don’t spend money on amenities you don’t need like granite countertops or a heated garage.
When you’re looking for an apartment or a rental house, research the area thoroughly to make sure you don’t pay above market price. Search on your own and contact landlords directly. This helps you avoid real estate agent fees and it lets you get to know the landlord before you sign a lease.
Before signing any documents, read the lease thoroughly. Look for hidden fees like parking and maintenance fees. Make sure you understand what’s included in the rent and what responsibilities you have as a tenant. Keep in mind longer leases tend to be less costly than month to month leases. If you have a tradeable skill, consider working in exchange for rent. Some landlords might value your skills as a plumber and give you a discount on rent for helping with some of the maintenance.
Tip #7: Save Unexpected Money
If you can live on your regular income, put any additional or unexpected income toward your down payment. When you get money from tax refunds, bonuses, gifts, or secondary income, save it for your down payment.
Saving up for a down payment can be challenging when you still have rent to cover every month. It takes a lot of discipline and determination. But by taking small steps such as reducing rent expenses and increasing your credit score, you’ll soon be well on your way down the path of homeownership.
Find out how 101 Financial’s Workplace Wellness program helps renters prepare for homeownership.