How to Save for a Down Payment While Renting

If you’re tired of renting and ready to start building equity in a property, don’t cancel your lease just yet. Saving for a down payment while you rent may require years of planning and scrimping before homeownership becomes a reality. However, it’s not impossible. Here are four steps to save for a down payment while renting, from understanding how much money you need to buy a home to creating a new budget and tackling any existing debt.

1. Determine How Much You Need to Save

Before you start setting money aside, it’s important to first know how much you need to save for a down payment. The amount can vary drastically depending on the home’s price tag, the area you hope to buy in, and the type of mortgage loan you plan to use for the purchase.

With conventional mortgages, it’s ideal to put down at least 20% so you start with more equity and pay less interest and fees. Some conventional mortgages allow for smaller down payments, with the tradeoff being the added cost of private mortgage insurance. Additionally, government-backed loan programs offer low or no down payment options; for example, FHA loans allow down payments as low as 3.5%, and VA loans allow 0% down.

To get a specific idea of what your home purchase budget may be based on your current finances and savings, you can work with a lender to get a mortgage preapproval letter. This involves a lender looking at your income, debts, and other financial information to give you an idea of how much house you’ll be able to afford. They’ll also be able to provide specific guidance around down payments and recommend loan programs that could work for you.

A less formal approach is to check out current listings in your desired area to learn what houses cost there and use a mortgage calculator to see what your monthly payment might be. You can use this information to make an informed decision on how much you want to put down.

2. Create and Stick to a Budget

Once you know your target amount to save, create a budget—or if you already have one, adjust your budget—to help you get there. As you make or tweak a budget, you’ll account for both the money that’s expected to come in and out each month.

Your expenses shouldn’t just account for rent, utilities, and other bills—it’s also where you can budget for money you’ll set aside for debt repayment and savings goals, such as your down payment.

If contributions to your down payment aren’t coming fast enough, or they take away too much of your disposable income, review your expenses closely. There may be ways to save money each month by reprioritizing or cutting certain costs temporarily, switching to less expensive service providers, or reducing how much you spend in certain categories each month.

It often helps to create a separate savings account for your down payment so it doesn’t accidentally get spent or used for other purposes. To make it even easier, you can set up an automatic transfer to move a set amount from your checking to your savings account each month. Experiment to see what works best for you.

3. Manage Your Debts

A mortgage will likely be the largest debt you ever take on in your lifetime. If you have significant existing debts, it’s smart to get them under control while you’re still renting.

When you have debt but want to buy a house, it can be hard to balance paying off debt vs. saving for a down payment. If your debt has hefty interest rates, it might be best to focus on making a dent in that debt before focusing on saving for a new loan. If you need guidance on how to manage your debts as you prepare for homeownership, consider meeting with a debt counselor or financial advisor.

Reducing your debt burden won’t just make your future mortgage payments feel less overwhelming; it can also improve your credit score, which increases your chances of qualifying for better mortgage terms.

4. Utilize Gifts and Grants

As you prepare your finances for buying a home, it may feel impossible to save enough while stomaching other expenses and rising costs—especially if mortgage interest rates continue to climb.

If your family still gives gifts for birthdays and holidays, consider using any upcoming gift-giving opportunities to ask for money you can put toward a down payment. Even $50 here or $100 there can add up and help. Just be aware that if family members want to contribute large amounts, lenders require disclosure that the gift isn’t actually a loan that is expected to be repaid.

You can also look into down payment assistance options. Some lenders, states, and local governments offer down payment assistance grants and programs, sometimes exclusively to first-time homebuyers. Down Payment Resource has a database of many of the current options out there.

Make Sure Your Credit Is Mortgage-Ready

While you dedicate yourself to saving for a down payment, make sure to keep in mind how your credit plays a role in your future homeownership. Your credit score is a key factor during the mortgage approval process and when your lender is determining your loan’s interest rates and fees.

Your down payment savings doesn’t play a role in your credit score. But by maintaining or improving your credit while you’re renting and saving, you’ll increase your chances of both qualifying for a mortgage and scoring one that has the best terms. The best ways to prepare your credit are to continue paying all your bills on time and make sure you’re lowering debt balances. It’s also a good idea to avoid taking on any new debts as you prepare your credit for a mortgage.

As you get on your budget we covered earlier, this should become much easier, and you can watch your progress by checking your credit score for free through various credit monitoring services.

At O1ne Mortgage, we understand that saving for a down payment while renting can be challenging. Our team of experts is here to help you navigate the process and find the best mortgage options for your needs. Call us today at 213-732-3074 for any mortgage service needs. Let us help you take the first step towards homeownership!