How Much Money Should You Save Before Buying a House?

How much should you save to buy a home?

When saving up to buy a house, you’ll likely need to have 3-20% of the purchase price of the home for a down payment, as well as 2-5% of the purchase price for closing costs. A home inspection typically costs at least $500, and moving expenses can be $1,000 or more depending on the size of the home and your needs.

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For most people, a home is the biggest purchase they ever make. As such, it’s a crucial financial decision that requires some thoughtful planning.

According to the National Association of Realtors, the median cost for a single-family home in the United States was $370,600 in June 2021. That’s an enormous sum for most of us, of course, but you won’t need all of it saved to buy a home. You can always get a mortgage, and the type of mortgage will impact how much you should save to afford a house. 

But there are also a number of other factors to consider, including where you want to live, how far you may have to move, and other monthly payments like property taxes and homeowners’ insurance.

How much money should you save to buy a house? “As much as you can” isn’t really an answer, but it’s not bad advice either. In this guide, we’ll help you think through the major expenses involved in buying a home, so you have a better idea of how much you should save for your unique situation.

Home costs to budget for

The down payment: 3% to 20% of the purchase price

You may have heard the “conventional wisdom” that you should put down 20% of a home’s purchase price as a down payment. However, due to modern hurdles of ownership like student loan debt, credit card debt, and car loans, it’s no longer feasible for every potential homeowner to make a 20% down payment. That amount is still recommended, but most buyers in 2020 saved only 12% of the home price as a down payment.

The Federal Housing Administration (FHA), some commercial lenders, and the Department of Agriculture all offer mortgage loans if you’re able to put as little as 3% down. If you qualify for a loan from the Department of Veterans Affairs, you may be able to put no money down. The Consumer Financial Protection Bureau (CFPB) notes that conventional loans with private mortgage insurance (PMI) can require 5-15% down, which would be $15,000-$45,000 on a $300,000 home.

There are tradeoffs to using these types of loans, however. For once, you’ll start off with less equity in your home and will have to make a higher monthly payment. For another, you might have to pay mortgage insurance and additional fees for such a low down payment.

When thinking about a mortgage, it’s a good idea not to buy a home with a monthly housing payment that costs more than 25% of your monthly take home pay. Include in that 25% the principal, interest, property taxes, homeowner’s insurance and, depending on the home, PMI and homeowners association (HOA) fees. You’ll know all of these applicable fees before signing any paperwork, so you can calculate based on your take-home pay.

While you don’t need the 20% down payment that you did 30 years ago, you shouldn’t just jump at the most expensive home you can get approved for with the budget you have. It’s still a good idea to make a down payment of at least 10% to get a more favorable monthly payment and avoid falling behind on rent payments or risk foreclosure.

Home inspection: $500 or more

Home inspections protect the buyer and lender by identifying issues in a house that might have been through a casual stroll. Sometimes, home inspections costs factor into the closing costs but, unless it’s specified that this is the case, you might need to pay out of pocket. A home inspection can cost a buyer more than $500.

Closing costs: 2% to 5% of the purchase price

When buying a home, closing costs are the expenses paid to complete the home purchase, including loan fees, initial property tax and homeowners insurance payments, title fees, and depending on where you live and the situation, attorney’s fees and home inspection costs.

Closing costs vary widely by state and loan type, but they tend to be 2%-5% of a home’s purchase price. In some instances, a home seller may help offset these costs, but for your own protection, you should budget about 5% of the home’s price for closing costs.

Moving expenses: $1,000 or more

Once you purchase the house, the expenses don’t stop. 

You still have to move, and even if you’re renting a truck and doing it yourself, you should expect to spend more than $1,000 on expenses. Renting a truck, packing it and unpacking it yourself, and moving to another home in the same town might run you only a few hundred dollars, but are you really going to just pick up everything from one home and put it in the same place in your new home? You’re very likely going to buy new furniture, new linens, new kitchenware, etc. to go with your new home. If it’s a bigger home, you might just need more stuff to fill it out and make it feel cozier.

Hiring movers is an even bigger expense that ranges based on how far you’re moving. Home Advisor estimates the cost of full-service movers at $2,300 to pack up and move the contents of a three-bedroom house locally.

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How long does it take to save for a house?

If you know you want to purchase a house and you aren’t already saving, it’s time to start. Every little bit helps since, as we’ve seen, you’re going to need a lot of cash to do it.

Depending on your income and ability to save, you could save up for your dream home in as little as a year, or it could take a decade. Student loans and high rent prices have made it difficult for millennials to buy homes and, when they do, 64% regret it often because of high mortgage and maintenance costs. That’s why it’s so important to strike a balance between putting down a substantial down payment without depleting too much of your savings. Homes never stop costing money—you need the money down to keep your monthly costs lower while maintaining a safety net for future unforeseen costs.

Let’s say you want to buy a home for $300,000, with a 10% down payment. You’ll need $30,000 for the down payment and up to $15,000 in closing costs. That’s $45,000, and you’ll have to decide how much of your savings you’re comfortable spending on one purchase. (And most financial advisors will tell you: Don’t withdraw from a 401(k) or pension fund to purchase a house—the tax penalties are not worth it.)

So how do you get there? Saving 20% of your income is a good goal. If you make $60,000/year and started with no savings, saving $12,000/year would have you at that $45,000 threshold within four years. If you’re comfortable putting less than 10% down, you could be there even sooner.

Should you buy a home with cash?

To this point, we’ve only discussed purchasing a home with a mortgage since it’s less common to buy a home with only cash. But if you have a sudden influx of money, from maybe an inheritance of major investment payoff, it’s typically much better to buy a house without a mortgage. 

Sometimes, you might be better off getting a mortgage when interest rates are low and you can secure a low down payment while keeping some of your money available for other investments. But if you have the money to buy a home you love outright, there are a number of benefits:

  • You’re more attractive to sellers who would like to close faster and avoid going through the closing process with a bank.
  • You’ll cut out the lengthy loan approval process.
  • You’ll avoid decades’ worth of interest fees.
  • You’ll avoid extra loan-related fees like PMI.
  • You won’t have a monthly mortgage payment.

Paying in 100% cash can save you tens of thousands of dollars in the long run. Of course, you’ll have to have the entire home’s purchase price, closing costs, and some liquid cash to cover moving expenses, new home upgrades, and future maintenance, but if you have $300,000 to spend now, it’s better than having to spend $450,000 over the next 30 years, which would likely be the case with a 30-year mortgage.

There’s no easy answer to how much money you should save to buy a house. The best answer is what you’re comfortable with. You should have enough money to make a large enough down payment to keep your monthly mortgage payment below 25% of your monthly income. That down payment amount shouldn’t be so large that it depletes your savings. Every situation requires some unique math and different risk tolerance, but this guide should have given you a better idea of what you’ll need to consider in your home buying calculus.

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