Reader Question: “I’m going to buy a house sometime next year, and I’m currently saving up as much money as I can to help me qualify for a loan. I’ve set up a special savings account for this purpose. My question is, how much money do I need to save to buy a house next year?”
First, I’d like to give you some kudos for being so proactive. Many would-be home buyers get turned down by mortgage lenders, simply because they haven’t saved enough money for their housing costs. It’s nice to see you’re planning ahead. It will make things easier for you, when it comes time to write a check for your closing costs. So, let’s address the question at hand.
How Much Money is Needed to Buy a House
How much do you need to save to buy a house? The amount you need will depend on several factors (mostly the size of your down payment). You’ll need sufficient funds for the following items:
- Down payment
- Closing costs
- Cash reserves
- Moving expenses
Let’s talk about each of these items in turn:
Your down payment is the biggest factor of all. Depending on the type of loan you choose, you might have to make a down payment of 3.5% to 20%. On a mortgage of $200,000, that would be the difference between $7,000 and $40,000, respectively. That’s obviously a broad spectrum. So the first thing you need to do is research the different types of mortgage loans, to determine what kind of down payment you might be facing. This will help you determine your down payment costs.
While the exact percentage of your down payment may vary, it will always be based on the size of your loan. So the more house you buy, the larger your down payment will be. So, when determining how much of a house you can afford, you need to factor in two things: (1) the size of your monthly payments, and (2) the size of your down payment. Both of these things are necessary when establishing your housing budget. They will also help you figure out how much money you need to save to buy a house.
If you qualify for a VA or USDA loan, you might not have to make a down payment at all. But those loans are only offered to certain types of borrowers (military members and low-income rural families, respectively). Everyone else will incur a down-payment expense of some kind, so it’s important to save money for it early on in the home buying process.
If you put down less than 20% on the loan, you’ll probably have to pay for private mortgage insurance (PMI) as well. There are ways to avoid this cost, though. You just have to make sure that the loan-to-value ratio of any one mortgage does not exceed 80%. Some people use a first and second mortgage to “sidestep” PMI. For example, the first mortgage accounts for 80% of the house price. The second loan covers 10% of the cost. And the home buyer pays the remaining 10% as a down payment. This is referred to as an 80-10-10 piggyback loan, by the way. But I digress…
Regardless of your financing strategy, you’ll have to save up enough money for a down payment of some kind. So plan early, and save as much as you can. More is better.
You’ll also need enough money to cover your closing costs, which are due on closing day (hence the name). These are the various fees and charges you rack up during the mortgage process. Basically, anytime somebody touches a piece of paper or performs an administrative task, you’ll have to pay for it. The seller might chip in to cover some of your costs — i.e., a seller’s concession — but you shouldn’t count on this. You should save enough money to cover them on your own, in case that’s what happens.
Closing costs usually range from 3% to 5% of the loan amount. So on a mortgage loan of $250,000 the closing costs could easily exceed $10,000. When you save money to buy a house, you need to factor in the closing costs.
Your lender may also require you to have a certain amount of cash reserves during the home-buying process. This is money you have in the bank, above and beyond your down payment and closing costs. They want to make sure you have saved enough money for your first mortgage payment, or your first couple of payments. Some lenders have this requirement, while others don’t. And even among those that do require cash reserves, the reserve requirement can vary from 1 to 6 months worth of mortgage payments in the bank! So be sure to get offers from more than one lender.
And then you have your moving expenses. You also need to save up enough money for these, when you buy a house. This is separate from the mortgage approval process, but I want to at least mention it. Do you have to rent a Uhaul truck to move your furniture? Need to buy new furniture? Planning to hire movers? Be sure you save enough money to cover these costs as well. Many buyers focus solely on their mortgage-related costs, to the point they forget about their moving expenses. Then they have to beg, borrow and steal to tie up the loose ends. Nobody wants that.
Don’t Forget Your Monthly Budget
The information above explains how much money you might need to buy a house. In addition to planning for your up-front costs, you should also create a budget for your monthly mortgage payments.
This is where many home buyers go astray. They put too much trust in their lenders, in terms of affordability. They figure the lender will only approve them for an amount they can afford. But that’s not always the case. So make sure you have a firm number in mind, as to what you can afford each month. And do not exceed that number.
This article answers the question: How much money do I need to save to buy a house?
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author