How to Save for a House While Living in a Rental Property
Mapping out plans to purchase a home while you're currently renting a property? Two experts—Angela Moore, MSPFP, CFP, MPAS, CRPC, CFEI and Arielle Minicozzi Figueroa, CFP, CSLP, financial planners and the founders of Modern Money Advisor—explain that your journey to buying a new house can be a smooth one, so long as you start with essential steps. "You may be able to get financing with less money down, but it's best to plan for the worst-case scenario so that you have the ability to negotiate and take the best offer in terms and rate," says Moore. "In addition to that, create an updated monthly budget incorporating the new expenses once you move into the new home, and plan to have a general emergency fund of six to 12 months of expenses including the new mortgage, utilities, and maintenance."
Before you do anything though, you'll want to take a deep dive into your financial state, including your credit score, so that you're making informed decisions based on what you really can afford. "To start, look at the range in home price you think you can afford, and how much you've saved, and make a plan to start saving to make up the difference," says Colleen McCreary, the chief people officer and financial advocate of Credit Karma. "Your credit score is another important financial factor. Increasing your credit score is one of the best ways to improve your chances of being approved for a loan with better terms." Once you've assessed where you are financially, you can have a better grasp on how to manage your money when living in a rental property. Ahead, our financial experts explain the best ways to save for a house while renting elsewhere.
Save every month.
An important part of the home-buying process is saving for a 20 percent down payment on the price of the home (plus closing costs), explains Moore. When consulting with clients, Minicozzi Figueroa suggests putting away your current rent plus 10 percent every month, which will be used towards your home purchase, or saving the difference between your new estimated housing payment (principal, interest, taxes, insurance, and HOA or maintenance fees) and your current rental payment. "This will accomplish three things," she explains. "One: it will allow you to save quickly. Two: it will show you that you can afford, not just qualify for, the new payment. Three: it will show the underwriter that you have a history of savings and this can be used to offset other risk factors." Consider a high-yield savings account, too. This way your money can earn interest, continue to grow over time, and get you even closer to making house payments, McCreary says.
Pay your bills on time.
Since lenders want to ensure you can pay back your debts, making payments on time is essential. Consider using automatic payments or payment reminders, and you'll essentially be saving yourself any issues in the homebuying process and increasing your credit health along the way, according to McCreary.
"Reduce all unnecessary spending for six months," says Moore. "By setting a short-term goal, it's easier to make big changes knowing that it's only temporary." In the event that you need to garner more savings, you can also reduce retirement fund contributions temporarily while you save for a down payment. "The caveat here is, this might not be the best option if you're close to retirement," adds McCreary. "But if you're young and actively contribute a percentage of your income to a retirement plan, like a 401(k) or IRA, consider temporarily diverting that money to down payment savings."
Reduce your debt.
"Your credit utilization ratio compares the amount of debt you owe to the amount of credit you have," explains McCreary. "Lenders want to ensure you're not borrowing more than you can pay back. A good rule of thumb is to keep your credit utilization below 30 percent." To make this a reality, pay off credit card balances in full each month or make consistent payments throughout the month, and consider additional part-time work if possible to boost income.
Use credit cards wisely.
McCreary's advice when it comes to using credit cards? Don't open multiple ones at once. "Every time you apply for a credit card or loan, it generates a hard inquiry on your credit report, which usually stays there for about two years," she explains. "Too many hard inquiries in a short period of time may turn lenders off because they may think you're looking for cash or about to rack up a lot of debt." Plus, don't close old credit cards, as McCreary notes that this can end up shortening your credit history. "Unless the annual fees outweigh the benefits, consider putting a couple charges a month on that card to keep your credit history longer," she adds.
Downsize, if possible.
Since rent usually accounts for renters' largest monthly expense, Moore and Minicozzi Figueroa recommend temporarily living with family or downsizing to save for a down payment. "Consider getting rid of your car if you can," Moore suggests, also noting that public transportation or ride share are helpful alternatives. "For many drivers, the cost of a car payment, car insurance, gas, parking fees, tolls, and maintenance adds up to well over $1,000 per month."
Consider a rent-to-own agreement.
Try a rent-to-own agreement, if possible, as this allows you to commit to renting a property for a period of time with the option of buying it before the lease expires. Moore and Minicozzi Figueroa also note that you can partner with a friend, business partner, or loved one to invest in a home together. At this point, you would each need to save for your piece of the down payment. However, you should still proceed with caution when planning to buy the home in this case. "You are legally obligated to repay the mortgage if your name is on the note and so is the other person," says Minicozzi Figueroa. "This could impact their ability to buy another home or refinance their home if they are already a homeowner and don't plan to live in the home with you. Only do this with someone you absolutely trust."