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Scott Sheldon
Scott Sheldon is a senior loan officer and consumer advocate in S... Read More
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According to the U.S. Census Bureau, the median sales price of new homes in May 2020 was around $317,000. Even if you’re purchasing a home that falls well below that average, chances are it’s one of the most expensive things you’ll ever buy. With such a big expense, you might be wondering—how much do you need to save for a house?
The good news? You don’t have to save for the entire purchase price. But the amount you might need on hand to buy a home can be significant. Get some idea of how much money you might need to buy a house below.
How Much Should You Save for a House Down Payment?
It all depends on the price of the home you want to buy and what type of loan program you qualify for. Down payments are usually a percentage of the home cost.
You might have heard that you need 20% down to buy a home. That’s actually not entirely true. Although the Consumer Financial Protection Bureau makes a case for the benefits of 20% down, it also notes that this number doesn’t work for everyone.
So, where does the 20% figure come from? It’s part of the guidelines set by Fannie Mae and Freddie Mac, government sponsored, mortgage guarantee companies. You either have to pay 20% down or pay private mortgage insurance, because analysis indicates that loans without 20% down are riskier for the lenders.
Here’s a look at some common mortgage options and how much you might need to have for a down payment:
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- The CFPB notes that conventional loans with PMI can require 5 to 15% down on average. If the home price is $300,000, that’s $15,000 to $45,000.
- Loans through the Federal Housing Administration require down payments of at least 3.5%. That’s $10,500 on a $300,000 home.
- Some loan programs, such as those for rural borrowers through the USDA, or those who qualify for loans through the VA, don’t require a down payment at all.
Other Expenses to Save for
Down payments aren’t the only thing you need to save for when buying a home. Closing costs can be thousands of dollars, and you may need to foot the bill for inspections, home repairs or even fun things, like new furniture. To make the home-buying process less stressful, it’s a good idea to save more than you expect to need for closing costs.
How Long Will It Take to Save for a House?
Saving 20% of your income could catapult you into purchasing a home in the next one to three years, depending on your market. For example, if you’re earning $96,000 per year, that’s $19,200 saved after one year. It’s $38,400 after two years and $57,600 after three. Even if you need 20% down, these amounts are roughly enough to help you buy homes worth between $100,000 and $300,000 within three years.
How Much of Your Savings Should You Spend on a House?
It’s tempting to empty out your savings or cash in your 401(k) to buy your dream home. Even if the house is just your first step into home ownership and isn’t perfect, it’s tempting to do what it takes to get those keys.
But spending 100% of your savings leaves no safety net if something happens. What if something breaks in your new home or there’s a medical emergency? Having some savings on hand to cover these issues helps protect your home, because you’re more likely to be able to continue to pay the mortgage.
Planning to Purchase a Home
If you’re planning on buying a home in the future, it’s important to start saving today. Every little bit you can do to save for a home helps make it happen.
If you want to buy a home for around $300,000 and you can’t qualify for a loan program that requires no down payment, you’ll need at least $10,500 to $15,000. You’ll also need closing costs and other fees, which typically run between 2 and 5% of the purchase price. Assuming $10,000 in closing costs, you need $25,000 minimum to position yourself for home ownership.
A Short-Term Plan
If you’re looking to buy a home within the next year or two, you’d need to save $12,500 to $25,000 a year. Saving 20% of your income can help you save the bulk of that in one or two years if you make more than $50,000 annually. To do that, though, you’ll need to set an aggressive personal budget and be willing to cut out some extras, such as cable or eating out.
A Long-Term Plan
By starting your journey to home ownership as early as possible, you can stretch your plan to five years or more. If you save over the course of five years, that’s only $5,000 a year. That’s $416 a month or just under $100 a week. You really could save for a house this way simply by cutting out a few expensive coffees, pizza nights, dinners, etc.
Start Saving Today
How much should you save before you try to buy a home? It depends on so many factors that there’s not a one-size-fits-all answer. So, do your research early, make a plan and stick with it. And, as you get close to being ready to buy a home, don’t forget to shop around to find the best mortgage rates. Because those mortgage rates, along with your home price, determine how much you’ll pay for your home.
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I am an expert in personal finance and credit-related topics, with a demonstrated understanding of various financial products and services. My knowledge extends to credit reports, credit scores, loans, mortgages, and other aspects of financial planning. I can provide valuable insights into the concepts mentioned in the article.
Concepts Covered in the Article: "How Much Money Do You Need to Buy a House?"
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Down Payment Requirements: The article discusses the misconception that a 20% down payment is required to buy a home. It clarifies that this figure is based on guidelines set by Fannie Mae and Freddie Mac. Different loan programs have varying down payment requirements. For example:
- Conventional loans with Private Mortgage Insurance (PMI) may require 5 to 15% down.
- Federal Housing Administration (FHA) loans require a minimum down payment of 3.5%.
- Some programs, like USDA loans or VA loans, may not require a down payment at all.
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Additional Expenses: The article emphasizes that down payments are not the only upfront costs when buying a home. Other expenses include closing costs, inspections, home repairs, and additional items like new furniture. Prospective homebuyers are advised to save more than just the down payment to cover these costs.
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Saving Timeline: The article provides insights into how long it might take to save for a house. It suggests that saving 20% of one's income could potentially lead to homeownership within one to three years, depending on the local housing market.
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Financial Planning: The importance of financial planning is highlighted, emphasizing the need to start saving early for a home. The article provides short-term and long-term plans, indicating the amount one needs to save annually based on their timeline for buying a home.
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Savings Safety Net: Caution is advised against spending 100% of savings on a home purchase. Having a financial safety net is crucial to handle unexpected expenses, such as home repairs or medical emergencies, without jeopardizing mortgage payments.
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Mortgage Rates Impact: The article suggests that as one gets closer to buying a home, it's essential to shop around for the best mortgage rates. Mortgage rates, along with the home price, significantly impact the overall cost of homeownership.
By considering these concepts, potential homebuyers can make informed decisions, plan their finances effectively, and navigate the complexities of the homebuying process.
