How to Save for a House If You’re Already in Debt

If you’re saddled with student debt, credit card debt, or any other type of debt that demands monthly payments, it may seem impossible to buy your own home. You’re paying dozens to hundreds of dollars a month on top of your other necessary expenses, and if your income is limited to begin with; the notion of saving up thousands of dollars for a down payment (up to 20 percent of a home’s price) seems like a distant dream.

However, your outstanding debt payments shouldn’t get in the way of homeownership. With the right strategy and enough patience, you can become a homeowner. Here’s how to do it.

Save for a House

Step One: Consolidate or Organize Your Debts

Your debts aren’t going to disappear overnight, but you need to take steps to properly assess and begin to address them. Start by taking inventory of the debts you owe, and where, as well as what you’re currently paying in interest. Many consumers benefit by consolidating those debts, organizing them into a single monthly payment; this not only makes it simpler to plan for and pay, but also may lower your total interest rate. If you have outstanding credit card debt, you might also be able to lower the interest rate on your card, just by asking over the phone. Do what you can to lower your interest rates and get your monthly payments down to a minimum.

Step Two: Create a Budget

Next, you’ll need to create a budget. There are many apps that can help you with this, including Mint and HomeBudget, but a simple spreadsheet works too. Your goal here is to document exactly how much money you make and where you spend it every month. Allocate your income to your necessary expenses, including your monthly debt payments, and make sure to funnel any extra to serve as additional debt payments or as part of your down payment savings. This should help you understand your cash flow, and give you a blueprint for saving money every month.

Step Three: Cut Costs

You may find that you don’t have much money left after expenses; if that’s the case, your first action should be to start cutting costs that aren’t necessary. The average American, for example, spends over $200 a month on entertainment—which isn’t necessary, especially since entertainment is available for free at local libraries, meetups, and organizations. Even shaving $100 off your entertainment budget could give you an extra $1,200 a year, and you’ll likely find even more unnecessary costs to cut. You might also consider moving to a smaller or cheaper location to reduce your rent costs, or changing your habits to reduce your utility expenses.

Step Four: Seek Extra Income

If cutting costs isn’t enough to help you save, your next step should be to start seeking extra income. Getting a second job may not be an option for you due to personal responsibilities (or if you already have a second or third job). If that’s the case, you can either strive for a better, higher paying job, or pick up side jobs and gigs for extra cash on the side. There are dozens of legitimate ways to make extra money online, from selling your crafts to writing a blog. Find one that fits your skillset.

Step Five: Fix Your Credit

Before you go any further, it’s a good idea to check your credit score. Lenders will look at your credit when determining whether to approve your mortgage application, so it needs to be in good shape if you’re trying to buy a house. It’s free to check your credit score at least once a year, so take the opportunity to see where your weak points are and begin working on them.

Step Six: Research Homes and Set a Target

When your credit’s in good shape, and you’ve adjusted your finances to save at least a few hundred dollars a month, you’ll be in good standing to start looking for potential homes to buy. Research different neighborhoods in your target location, and run mortgage payment estimates to determine how much home you can afford; the last thing you want to do is buy a home that’s more than your monthly budget can allow. From there, you’ll know exactly how much to save for a down payment, and you can begin working toward that goal.

Juggling debt from various sources may make it more difficult to save up for a down payment, but it certainly doesn’t make it impossible. If you follow these steps, you should find yourself with more than enough cash to buy a house within a year or two—and maybe within a few months.