7 Realistic Ways to Save for a House While Renting

It’s your landlord vs. your savings account: and your landlord is winning.

You’re not the only one who is finding it difficult to handle rising rents and keep your dream of owning a home alive.

Before you throw in the towel and resign yourself to renting forever, you should know two things:

You don’t need to save as much as you think to buy your first house.
You might be able to ditch renter status faster than expected…and these seven steps can help you set a moving date.

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What you should know about down payments
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First, let’s bust one of the biggest myths about buying a home: you need 20% down in order to qualify for a mortgage.

It’s simply not true. The average homebuyer puts down 12% and first-time homebuyers only put down an average of 7%.

First-time homebuyer mortgage loan programs through companies like Fannie Mae or Freddie Mac offer home buyers options of as little as 3% down for borrowers who have fair credit and meet certain debt-to-income requirements.

The median price of a home in the U.S. in early 2022 was $408,100. If saving over $80,000 isn’t possible for you (who can do this??), that’s okay. Instead, you can focus on creating a mortgage-ready financial profile for yourself with these seven steps:

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#1: Start a savings account just for your down payment

One of the most effective ways to save for a down payment is to give it its own bank account.

Why? Seeing the money you’ve reserved specifically for your future home grow over time is motivating – and if you set up automatic deposits, you won’t even have to think about the logistics. Plus, you’ll be less likely to dip into these savings for other purposes.

Next, identify opportunities to give this account a savings boost. Many first time home buyers use their tax refund to cover closing costs and inspections during the home buying process or add it to their down payment fund.

Heads up: when you get closer to your purchase date, keep in mind that funds that are being used towards a down payment must be “seasoned.” This means that the funds are in your accounts for at least 60 days before you can use them for this purpose.

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#2: Get control of your debt

One of the first things a mortgage lender will look at is your debt-to-income ratio (DTI).

Your DTI is the percentage of gross income that is used to pay minimum monthly debt payments. Gross income is the sum of all the money you brought in before taxes and expenses are taken out.

This is one way lenders decide how risky of a borrower you are – if you have a high DTI, meaning, your debts are a large percentage of your total income, it’s less likely you’ll be able to consistently pay your mortgage on time.

But a low DTI indicates you’re less of a risk – they trust you’ll be able to easily make the payments, which means their loan is safe. The ideal back-end DTI for most lenders is less than 36%, and definitely not more than 43%. Learn more about how to calculate DTI here.

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What’s your DTI?

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To calculate DTI, add up all monthly debt payments (example: car loans, credit cards, student loans). Note: rent is not included in the DTI calculation.

Next, divide that number by your total gross monthly income and then multiply by 100 to get to a percentage.

DTI too high? That can be a mortgage deal-breaker. There are two ways to solve this problem:

• Increase your income. If your gross monthly income goes up, your DTI will go down. If you’re part-time at work, can you take on more hours or go full-time? Could you add overtime? What about a side hustle? Can you switch jobs for a pay raise? (We’ll get more in-depth on boosting income later).
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• Reduce your debt. Take a hard look at your list of debts. Do you have a credit card balance you could work on paying down? Could you trade in that expensive SUV for a cheaper commuter car? By taking steps to pay off your debt, it can also increase your credit score too, so it serves a dual purpose in getting you mortgage-ready.

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#3: Boost your credit score

The next way lenders assess your mortgage-readiness is by looking at your credit score.

Borrowers with higher credit scores will typically have a lower interest rate because lenders trust them to pay their debts based primarily on past payment history. Borrowers with lower credit scores will pay more for loans because they pose a higher risk to lenders. You know this – but how high does your credit score really need to go?

Don’t just aim for the minimum requirement (you’ll pay more in interest) – but you also shouldn’t waste years trying to get your credit score to 850 before you apply for a mortgage.

As a baseline, Fanne Mae HomeReady mortgage applicants need to have a 620 credit score, but most lenders are looking for 650 or higher. Freddie Mac requires a 660 minimum for their Home Possible loan.

In reality, the average person has a credit score between 670 and 740, and 90% of successful mortgage borrowers are above 670. North of 740? You qualify for the best interest rates a lender can offer.

If you’re working to repair and improve your credit score, aim for the high 600s – this is going to give you access to more loan options and lower rates.

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3 simple ways to put credit score improvement on autopilot

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Understanding your credit score is important, and it can be a complex topic, but making small improvements every month is straightforward. Here are three ways to do it:
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#1: Pay bills in full, on time, every time.
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Set up automatic bill pay and take the pressure off yourself to make sure you’re paying all of your bills by the right date – in full. One of the biggest downfalls for many would-be borrowers is simply forgetting about a credit card bill due date, and then watching their score get dinged because of it.

A common credit card myth? That carrying a balance helps improve your credit. This is false. Small balances don’t help your credit score go up – they just make you pay interest. Always aim to totally pay off your cards every single month.

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#2: Monitor your mortgage credit score.

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Knowing where you stand shows you how far you have to go. Your mortgage credit score is different than what you’ll see in Credit Karma. Check your mortgage credit score with Gravy+, get notified when things change, and make the improvements that a mortgage lender will care about.

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#3: Regularly pull your credit report and check for errors.

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You can also see your full credit report in the Gravy app. Once every couple of months, check and see if you notice anything that seems off.

Credit bureaus are known to make mistakes, and you don’t want a paperwork error adding thousands of dollars in interest to your future mortgage payment. You can contest any errors with the big three credit bureaus: TransUnion, Experian, and Equifax. Typically this involves showing proof of the error, such as a “paid in full” statement for an account they still show as open and overdue.

#4: Reduce or hit pause on retirement savings

Buying a home is one of the largest investments that an adult can make and it’s one of the best ways to build wealth.

The median homeowner’s net worth is 40 times higher than the median renter – most of that gap is because of home equity. Spoiler alert: renters aren’t going to catch up by making 401k contributions.

That being said, no one should turn down free money. If your employer provides a 401k match, take advantage of it! Typically it’s around 3-6% of your annual salary, and you should keep these contributions going.

However, if you’re serious about saving for a home, make your money choices reflect that – if only for a little while. Once you’ve bought a home, you can go back to maxing out your 401k (and you should!).

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#5: Lower or eliminate rent costs

52% of young adults between 18 and 29 years old choose to live with one or both of their parents in order to save for a house or pay off debt.

Moving in with family is the best way to cut a major expense and expedite the savings process. And if this is possible for you, do it!

Housing is consistently the largest part of anyone’s budget, and that’s especially true now when rents are rising dramatically around the country.  

If moving in with family isn’t in the cards, take a close look at other options. Could you add a roommate? Could you move to a cheaper apartment while you ramp up your savings?

If you do have to pay rent, get credit for it in the form of Gravy Rewards: real money you can use towards your home purchase. Download the app and start earning 5% cash back on monthly rent.

#6: Cut spending and add income

Realistically, most people will have to cut back on spending in some area of their lives when saving to buy a house. Skipping expensive vacations or hitting pause on new additions to your shoe collection is a great start – and the cuts are only temporary.

Find one area of your budget you tend to splurge, and put a moratorium on spending for a set period of time.

On the flip side, increasing income is an effective way to make your spending cuts feel more impactful. Start with your main source of income – your job.

The annual performance review is a perfect time to ask for a raise. Gather statistics on what others are making in your same pay grade and field then put together a list of your accomplishments since your last raise. Remember to be specific in your ask because your employer won’t know what you want unless you tell them.

If a raise is not an option, a side hustle is a great way to add to your down payment savings.

Find a skill that you are good at and can do in your spare time like offering freelance services on marketplaces like Upwork (if you have a skill like website development or bookkeeping). Technology makes it easier than ever to quickly make extra cash, from signing up to be a dog-sitter on an app like Rover, to delivering pizza through DoorDash.  

#7: Get gifts from friends and family

At least 26% of homebuyers in 2021 used gift funds from friends and family to purchase their home.

This is a great way to give your down payment account another savings boost, but who is able to gift you money varies depending on the loan you apply for.

No matter what, substituting down payment contributions in place of gifts for your birthday, wedding, baby shower, or the holidays is going to help you in your homebuying journey.