How to Save for a House While Renting

Take a moment and open your banking app. Scroll through it and note how much your rent is. That’s thousands of dollars going straight into your landlord’s bank account instead of building your own equity.

Rent prices have risen in recent years, and dreams of homeownership continue to drift out of grasp as mortgage rates have increased. After all, how do renters leave the monotony of renting and ascend to homeownership? Money for a down payment, good credit, and backup savings. All of which are harder to achieve while paying rent.

But there’s a silver lining.

Buying a house while renting doesn’t only depend on your savings capacity. If saving a $80,000 down payment or greater seems impossible, that’s ok. Your goal is not only to find ways to save but to be eligible for an attractive mortgage.

Keeping that in mind, the team from Prevu Real Estate highlights the top steps to help you save for a home purchase while renting.

Tips to save for a house while renting

• Improve your debt-to-income ratio
• Work on boosting your credit score
• Find ways to increase your income
• Use any opportunity to cut rent costs
• Set up an effective savings plan

Improve your debt-to-income ratio

The key to a mortgage lender’s heart is an attractive debt-to-income ratio (DTI). The better your ratio, the higher your chances of securing a favorable interest rate. 

How do you improve your debt-to-income ratio? By reducing your monthly payments. 

Even an aspiring buyer with limited savings capacity can potentially improve their DTI. But before we dive into the most effective ways to boost your ratio, it’s important to understand how your DTI is calculated.

Your DTI ratio is the sum of your monthly payments divided by your monthly gross income.

The sweet spot you’re looking for is around 25%. In some cases, 30% can also cut it, but to be as comfortable as possible, you want to shoot for the former. So how do you go about reaching that threshold? Divide and conquer. 

Start by looking at your most demanding and more manageable debt. While overbearing debt like a car loan or student loan may seem urgent to pay off, chances are you’ll have to dig into the trenches for the long haul before they’re history. 

It’s actually more effective to focus on the smaller debt first. If you have a nagging credit card debt in the few thousands that you’re pushing out of your sight one minimum payment at a time, put your effort into knocking it out completely. 

Erasing a debt, no matter how small, can have a significant impact on your DTI. 

Work on boosting your credit score

A good credit score is the second step to helping you stand out to mortgage lenders.

You don’t need an 820 to secure a good rate, but you should try to aim for an above-average score (700-750) as you look for ways to increase it.

There are plenty of things you can do that will help improve your credit score, but a few tried and true methods remain the most effective.

Always try to pay your loan and credit card bills on time. First, late fees can seriously cut into your savings capability and add up quickly. Second, late payments can result in a lower credit score. The bright side is that on-time payments can help boost your credit score.

Another key factor is credit utilization. Ideally, you wouldn’t be using more than 30% of your allotted credit. Your credit score may take a hit as soon as you pass that mark. If you’re in a situation where your score is low, and credit utilization is high, set your sights on that 30% threshold. 

Dropping your credit utilization to that preferred marker, even if it means larger monthly payments, can instantly benefit your score.

The higher your score, the better your chances of securing a favorable mortgage rate and a loan that might allow you to put less than 20% down on a home. 

Find ways to increase your income

It may elicit a sarcastic chuckle from some, but finding ways to increase your income can be key when saving for a home. 

The idea is to create extra cash flow dedicated specifically to your homebuying goal. Before you decide on any kind of gig or side job, commit right off the bat to saving any extra money earned towards your down payment. You can even open a dedicated savings account and set up automatic deposits.

That commitment can help add urgency and value to the side job, even if the income isn’t as lofty as your day job. 

It’s also an excellent opportunity to turn some of your hobbies into lucrative projects. Anything from freelance work, such as photography or writing to arts and crafts can help you start saving toward your future home.  

Use any opportunity to cut rent costs

Roughly put, paying rent is one of the biggest obstacles to homeownership. 

Most Americans pay close to 32% of their annual income in rent. Compound that with monthly expenses and other forms of debt, and it’s not surprising that many aspiring homeowners find themselves in an uphill climb when trying to save for a down payment while renting.  

But if you’re committed to making homeownership a reality, finding ways to save on rent should be your top priority.

Maybe you don’t need to be a block away from the subway or train. Maybe living with relatives doesn’t seem so bad after all (especially if they’re willing to let you live rent-free). 

Cutting down on comfort in order to save is a sacrifice that may be rewarding in the long run. If your work is remote, consider moving to an area with a lower cost of living. If you can manage with a smaller space, consider downsizing in favor of cheaper rent payments. You can also find a roommate or two to help reduce your share of the rent. 

But if you commit to these cuts, don’t forget to set aside the money you save for your ultimate goal. This way, you can feel the reward immediately, and it will help you stay motivated to pursue homeownership. 

Set up an effective savings plan

It may seem counterintuitive, but kicking off the previous steps in motion first is the best preamble before setting up an effective plan to save money.

It can be tempting to visualize your dream home, post it on your dream board, and settle on an amount to be set aside each month towards a down payment and closing costs. Though simple and easy, that approach can actually make your homebuying journey longer.

Focusing on priorities – improving your credit, cutting back rent costs, finding an extra source of income – is a way to change your financial dynamic. Optimizing your financial output and stability is like setting a strong foundation on which you will build your homeownership dream.

Once you have those things in order, you’ll have a much clearer picture of how to structure your savings. 

If you manage to boost your credit score, maybe you won’t have to save for a 20% down payment and instead set aside 15%. If you cut back on your rent costs, you can use all that extra cash to quickly pay off outstanding debts first and immediately boost your DTI ratio. And once you take care of the numbers mortgage lenders look at first, you can safely choose a comfortable amount to set aside for savings each month that you can commit to. 

Interested in buying a home this year? Browse listings and learn how you can save with Prevu’s Smart Buyer Rebate.