Buying a home is one of the largest purchases most people will make in their lifetime. With payments spread out over decades, you gradually chip away at the mortgage until the home is entirely yours. However, along with the monthly payments, you’ll usually need to pay some hefty upfront costs.
If you’re wondering how to save for a house, how much to save, and how to minimize your upfront costs, here are some facts and figures that can help you out.
- You’ll likely need to save for various costs, including the home inspection, down payment, closing costs, mortgage insurance, homeowners insurance, and more.
- Start by creating a realistic savings plan, saving tax refunds, borrowing from a retirement plan, or asking your parents for help.
- Minimize upfront costs by looking for down-payment assistance programs, exploring government-backed loans, and negotiating with the seller.
How Much Should I Save for a House?
When preparing to buy a house, one of the first steps is figuring out how much money you’ll need upfront. There are a variety of costs to cover, from the down payment to paying movers. Here’s what you should keep in mind.
As soon as you’re under contract on a house, schedule a home inspection. A professional inspector can ensure you’re aware of any necessary repairs or underlying problems.
The cost for an inspection typically ranges from $300 to $500, according to the U.S. Department of Housing and Urban Development (HUD).
Most loans require you to put money down upfront. The required down-payment amount can range from 0% to 20% of the purchase price, depending on the loan you choose. In 2019, the median down payment for first-time buyers was 6%, while it was 16% for repeat buyers and 12% overall, according to the National Association of Realtors Research Group.
An increasing number of low-down-payment programs have become available that make it less expensive to buy a home initially. However, putting down less than 20% will add mortgage insurance to your long-term costs. Further, it will result in a larger loan, higher monthly payments, and more interest paid over the life of the loan. Be sure to review your finances and weigh the pros and cons of a low down payment carefully.
The costs associated with finalizing your mortgage, also known as closing costs, typically range from 2% to 5% of the home’s purchase price. They often include the following:
- Application fee
- Appraisal fee
- Attorney fee
- Credit check fee
- Discount points
- Origination or underwriting fees
- Prepaid interest
- Tax service fee
- Title search fee
- Title insurance
- Transfer tax
Your costs as a homebuyer can vary depending on factors such as your loan type, your lender’s fees, the location of your new home, the size of your down payment, and the home’s purchase price.
If you make a down payment that’s less than 20%, you’ll typically be required to get private mortgage insurance (PMI) to protect the lender against the risk of default. In most cases, mortgage insurance will be paid along with your monthly mortgage payment. However, in some cases, an upfront payment will be required.
For example, Federal Housing Administration (FHA) loans require 1.75% of the loan amount for the upfront mortgage insurance premium (UFMIP). Further, you’ll often be asked to put two months of mortgage insurance premium (MIP) payments into an escrow account.
Most mortgage lenders require borrowers to carry homeowners insurance, and it’s not a bad idea to protect your investment. While the insurance premium is usually paid monthly, in many cases, you’ll be asked to put two months of estimated annual real estate taxes and insurance payments into an escrow account at closing. According to the latest data from the Insurance Information Institute, the national average cost of homeowners insurance is $1,249 per year, or about $104 per month.
Moving into your new home also typically will come with costs that can differ depending on the size of your home, how far you are moving, and the weight of your belongings. The average cost to hire movers (for a move of less than 100 miles) is $1,571, according to HomeAdvisor.
When you move into a new space, you will generally need to purchase new furnishings. Your existing belongings may not fill the home, may not match, may not fit in some rooms, or may just need replacing. The average cost of furnishing a home is about $16,000, according to HomeAdvisor.
You’re bound to have other things you need for the home that you weren’t expecting, whether it’s some landscaping work, repairs, or new handles for the kitchen cabinets. Further, something may go over budget during the home-purchase process, so it’s a good idea to have a bit of a cushion to cover incidentals. The general rule is to set aside about 1% of the purchase price of your home every year for repairs and maintenance. Be sure you have at least that ready for the first year.
Let’s look at an example. Say you are going to buy a house that costs $481,700, the average sale price in 2021. Here’s an estimation of how the costs would break down with an FHA loan.
|Down Payment on FHA Loan (3.5%)||$16,859.50|
|Closing Costs (4%)||$19,268|
|Mortgage Insurance (1.75% + 2 months)||$8,830.75|
|Homeowners Insurance (2 months)||$208|
Keep in mind, these expenses can fluctuate significantly depending on your situation and the details of your loan. For example, if you received a U.S. Department of Agriculture (USDA) loan, you would have no down payment required.
On the other hand, if you put 20% down on a conventional loan, you would have to come up with a higher down payment, but would not owe for mortgage insurance. Home furnishings can also vary quite a bit, depending on your needs and preferences.
How To Save for a Down Payment
Once you have your savings goal, you’ll likely wonder how you’re going to be able to meet it. While saving cash when you can is a good start, here’s a look at a few other ways to speed up the process.
Create a Savings Plan
First, you can save the old-fashioned way. Figure out how much you’ll need to buy a house. With that number in mind, review your budget to see how much you can put aside each month. Explore ways you can cut back on spending and increase your income to save more. Savings accounts don't make much interest, so a certificate of deposit (CD) or money market account could be better for this major savings goal.
Once you identify a reasonable monthly savings goal, figure out how long it will take you to save up the amount you need. For example, if you can save $1,000 per month and you need $20,000, you could be ready to buy in 20 months.
Save Tax Refunds
If you receive tax refunds each year, those windfalls can be an opportunity to boost your savings and shorten the time it takes to buy a home. Using the example above, if you can save $1,000 each month and also receive a tax refund of about $4,000 each year, you potentially could reduce your savings period to as little as 12 months.
Borrow Against Retirement Plans
If you have a retirement plan, you could consider borrowing against it. Many 401(k) plan providers offer relatively low-cost loan options that could be applied to buying a new home. In addition, this type of loan won’t affect your credit score or count against your debt-to-income (DTI) ratio, which is important when trying to get a mortgage. Also note that if you have an individual retirement account (IRA), you can withdraw money for a house if you are a first-time homebuyer.
However, there are drawbacks to this approach. The loan will be secured by the funds in your retirement account, so if you don’t repay it on time, your retirement savings may be used to repay the loan. When that happens, you can face income taxes on the amount and an early-withdrawal penalty of up to 10%, if you’re under age 59 1/2.
Also, if you leave your job, your loan balance could become due within about two months.
If you choose to tap into retirement funds for a home down payment, consider how much growth on your retirement assets you’re missing out on by borrowing that money. Taking this route can be a good option, but isn’t without its risks.
Ask Your Parents
If a parent is willing and able to help you out, they can gift you up to $16,000 per year (as of 2022) without any tax consequences. Further, if you have two parents willing to help, they can each gift you $16,000 without worrying about taxes on that money. If they wanted to go a step further, they could also each gift your spouse $16,000 tax-free as well. The key rule with gifts is that they can’t require repayment in money or money’s worth.
How To Buy a House With No Money Down
It’s also possible to buy a house with little to no money down, or at least out of pocket. However, it’s important to consider the potential drawbacks of this option. If you aren’t getting grants or forgivable loans, you’ll have more to pay back later. That said, in some cases, breaking up a larger amount over time may be the best (or only) route to homeownership.
Here’s how you may be able to minimize the amount of money you have to put down.
Look Into Down-Payment Assistance
Down-payment assistance programs help to cover your down-payment costs with grants, second mortgages, and tax credits. You can find these programs from federal, state, county, and city governments. If you aren’t sure where to start, you can speak with a housing counselor or lender and check our state-by-state guide to down-payment assistance.
Explore Government Loan Options
HUD offers several government-backed mortgage programs that help to make homeownership more affordable.
If you’re a veteran, service member, or surviving spouse, you may qualify for a U.S. Department of Veterans Affairs (VA) loan with nothing down and no mortgage insurance requirement. USDA loans are another option that comes with the 0%-down benefit. However, you’ll need to buy a home in a qualifying rural area. Then, there’s the FHA loan, which allows for credit scores as low as 500 and down payments from 3.5% to 10%.
If you’re looking to minimize your costs, these programs may be able to help. They all work in a similar way in that the federal government backs the loans, which are provided by third-party lenders.
Ask the Seller for Money
Don’t forget that you can negotiate with the seller. If you’re in a buyer’s market, you’ll have a bit of leverage. The seller may be willing to pay some or all of your closing costs, give you the down payment as a credit, or both. Talk it over with your real estate agent to see if they think it’s viable to ask.
Keep in mind that asking the seller for help with purchase expenses likely won’t go over well in a seller’s market, where the existing homeowner has the edge. Also, check with your lender to ensure it’s OK to receive credit from the seller in your situation.
The Bottom Line
When you’re thinking about buying a home, one of the first steps is to figure out how much you need to save. Luckily, there’s no shortage of mortgage options that can suit almost every budget and credit score. Review reputable mortgage lenders, loan programs, and down-payment assistance options to figure out which route is best for you. Once you have a number in mind, create your savings plan. Stick with it and in no time, you’ll be holding the keys to your new place.
Frequently Asked Questions (FAQs)
What is the average down-payment percentage for a house?
The median down-payment percentage for a house is 6% for first-time homebuyers, 16% for repeat buyers, and 12% overall. Repeat buyers can often sell or borrow against a previous home to help them afford a larger down payment.
When do I have to have my down payment for a house?
The exact time your lender will require you to have your down payment in place can vary. In most cases, you will need to pay a portion of your down payment (1% to 3% of the sale price) when you make your offer. Referred to as “earnest money,” this is a good-faith deposit.
The earnest money is deposited into an escrow account and will be credited toward your closing costs or down payment when the sale closes. The remainder of the down payment will be due at closing, although a lender or seller may want to see proof of funds in the days or weeks before closing.
How do I get help with a down payment for a house?
If you need help coming up with a down payment for a house, you can look into down-payment assistance programs. You may be able to find programs through your state’s housing finance authority, your local city and county governments, HUD, a housing counselor, or your lender. Assistance comes in various forms, including grants, second-mortgage loans, and tax credits.