The need to save looms large in the home-buying process.In surveys, would-be and recent home buyers often list coming up with the money for a down payment as a top stressor in the purchasing process. At the same time, the difficulty of saving while paying off student loan debt and high rents is often cited as a reason younger generations are taking longer to become homeowners.
The numbers can be daunting: With the median U.S. sales price for a home around $400,000, a down payment of 20% would be about $80,000. Even though you’re not required to make a down payment that large (more on that later), you’ll still need cash for closing costs, home repairs, and other expenses.
While repeat buyers often rely on the proceeds from the sale of their home to buy their next property, 47% of first-time buyers use savings to make a down payment, according to the National Association of Realtors. (The rest may get gifts or loans from family, as well as down payment assistance offered by state or local housing finance agencies.)
How much money do you need to buy a house?
While the down payment tends to be the biggest chunk of money needed and therefore a focus for buyers, there are several upfront costs to buying a home.
Down payment
A common misconception is that to buy a home you must make a down payment equal to 20% of the home’s value. In reality, the typical down payment for a first-time home buyer was 6% in 2022 and the typical down payment for a repeat buyer was 17%, according to NAR.
“The recommendation is to make a down payment of 20%, no more and no less,” says Isabel Barrow, director of financial planning for Edelman Financial Engines in Alexandria, Va. “But realistically, while we know it’s good to get to 20% if you can, not everyone can save that much, especially in a high-cost housing market.”
It’s possible to get a conventional loan with as little as 3% down. With some government-insured programs such as VA loans and USDA loans, borrowers may not need a down payment at all.
That said, in general, the more you can put down the better. Barrow says if you make a lower down payment, your mortgage rate may be higher, and if it’s less than 20% you’ll likely need to pay for private mortgage insurance, which adds to your housing cost and only protects your lender.
Closing costs
Closing costs range from 3% to 5% of the loan amount depending on where you live. While some closing costs are fixed expenses, such as property taxes and recording fees, others are optional. For example, you can pay extra for mortgage points (each point costs 1% of your loan amount) to lower your interest rate.
Moving expenses
Moving costs vary depending on whether you’re making a local or long-distance move, how much furniture you have, your location, and whether you do it yourself or hire professionals. The average cost of a local move by professionals is $1,250, according to Moving.com. (News Corp, parent of The Wall Street Journal, operates Moving.com.)
Cash reserves
Some lenders require borrowers to maintain enough cash in the bank to cover a few months of housing costs. If you take out a jumbo mortgage, which is a loan for more than the conventional loan limits in your area, your lender may require cash reserves of six to 12 months.
Even if your lender doesn’t require cash reserves, you should make sure you have several months of expenses saved to pay for emergencies and to make sure you can cover your mortgage for a few months should you become ill or unemployed.
Home maintenance funds
It’s also smart to keep a special stash of cash for home maintenance and unexpected repairs. Many financial experts recommend budgeting at least 1% of your home value each year for those costs, but how much you need depends on the condition and age of the home you’re buying.
5 strategies to save for a house
Zillow estimates that the typical household would need to save 5% of their income for nine years to save a 10% down payment on a median-priced house. If you’re not willing to wait that long, you’ll need to take a more aggressive path.
A two-pronged approach that focuses on generating more income while reducing spending works best for important savings, says Tom Mathews, a certified financial educator and founder of WealthWave, a financial services marketing company in Atlanta.
1. Start planning early
Saving is easier when you have a clear goal. Estimate your purchase price and ideal down payment amount. Then, think about when you would like to buy.
Divide the down payment number by the number of months until your target purchase date to come up with a monthly savings target. For example, if you’re aiming for $50,000 down on a $500,000 home in three years, you’ll need to save nearly $1,400 a month.
If you need time to build up to that amount, start smaller. One option is saving the difference between your current rent and your projected mortgage payment. For example, if your rent is $2,500 and you expect a mortgage payment to be $3,000, start by saving $500 a month. This will help you build up cash and begin to adjust your budget to a higher payment.
2. Cut back on discretionary spending
For most people, some sacrifice is needed to buy a home, says Matt Steenson, head of consumer banking for PNC Bank in Pittsburgh. Among the most common sacrifices, according to NAR research, is to cut spending on luxury goods, entertainment, and clothing.
Subtract your essential spending (rent and loan payments, for instance) from your net income, then review your discretionary spending to look for places to cut. Some examples are swapping a pricier vacation for a staycation, cooking at home more than eating out, and finding free online workouts to save on a gym membership.
A budgeting app can help you track spending and find places to cut. An app can also alert you when you go over budget. “Realistically, you’re not going to cut out everything for several years, but you should consider cutting back on eating out or entertainment,” Barrow says.
3. Consider downsizing
Housing is the largest monthly expense for most people. That means the fastest way to save is often to cut costs on the place you live. If you have the option, you might consider moving in with relatives to eliminate your rent altogether, Mathews says. Alternatively, you may be able to move to a less costly rental or bring in roommates to share your housing costs.
4. Reallocate your income
You need to pay taxes and save for retirement, but there may be opportunities to spread those payments in a way that better aligns with your goals.
Start by reviewing how much tax your employer is withholding from your paycheck. You can do this with your Form W-4. While you may like the idea of getting money back at tax time, a refund technically means you overpaid your income taxes. You would be better off saving that extra money in an interest-bearing account all year. Go over your paycheck and see if you can have a little less withheld—but make sure you save and not spend that amount each month.
If you’re young, another option may be reducing your retirement contributions for a year or so may be a viable strategy to increase your savings, says Steenson. However, he says you should at least save the minimum to earn any 401(k) matching contributions your employer offers and have a plan to increase your contributions after you buy a house.
While you may be tempted to also cut back on your debt payments—don’t. It’s smarter to pay down or pay off those balances if you can.
“Not only will this make it easier to manage your housing payment when you buy, you’ll improve your credit score and possibly qualify for a better interest rate on your mortgage,” Barrow says.
5. Boost your income
If you’ve been in your job long enough and are performing well, asking for a raise may make sense. If you work at an hourly rate, ask your regular employer for additional hours.
If you’ve optimized your earnings from your primary job, consider ways to earn extra income. The variety of side hustle options available are endless: pet sitting, dog walking, food delivery, ride-share driving, and child care to name a few. Some people even monetize their hobbies by selling crafts and collections through an Etsy shop or similar.
Where to put your home savings
Your savings can accumulate more quickly if you store it in the right type of account.
“There’s both a discipline side and a financial vehicle side to saving money,” Steenson says. He recommends setting up a separate account for your down payment and automatically transferring money into it each month.
Federal Deposit Insurance Corp.-insured money-market accounts, high-yield savings accounts, and certificates of deposit all have interest rates in the 4% to 5% range right now, Steenson says. Since with a CD, you agree to not access your money for a designated time, make sure to align maturities with your anticipated purchase date.
“If you plan to open several CDs, you need to be highly organized and maybe keep a spreadsheet to make sure you know when they mature,” Barrow says.
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More on home buying
- How to Get a Mortgage
- How to Find a Real Estate Agent
- When Is The Best Time to Buy a House?
Meet the contributor
Michele Lerner
Michele Lerner is a contributor to Buy Side from WSJ.
