How much money should I save before buying a house?

You’re ready to dip your toes into homeownership, but you’re not exactly sure where to begin. For one thing, you’re wondering how much money you need to save up, and what costs you can expect when you buy a house.

With home prices reaching a median of $428,700 across the U.S. in Q1 of 2022, it’s important to set a budget and plan your savings accordingly. 

If you’re using a mortgage, you’ll need to set aside money for a down payment. Then there are closing costs and moving expenses to consider. And don’t forget inspections, appraisals, and unexpected costs like new furniture and home repairs. It can be overwhelming to say the least. 

Besides saving money, you’ll also want to get your credit score in good shape before applying for a mortgage. A strong credit score can save you money on interest and make it easier to get approved for a loan. 

Wherever you are in your savings journey, it’s crucial to understand what’s ahead. Here’s a rundown of the major expenses to expect when saving up to buy a house. 

Down payment

A down payment is cash you put down for a new home, and it’s written as a percentage. For example, if you buy a home for $300,000, you might make a down payment of 10%, or $30,000. The lender covers the rest — with interest of course.

So how much do you need for a down payment? At some point, you might have heard that you need to put down 20% on a house. That number can make homeownership seem out of reach for the average buyer. Thankfully, the 20% down requirement is a myth. 

In fact, according to National Association of REALTORS® data, the typical down payment is 12%. For first-time buyers, it’s more like 6% to 7%. Many buyers are able to put down as little as 3% or 5%, and some buyers even put down 0%. 

Making a low down payment probably sounds great. It’s one way to get your foot in the door. But there are a few caveats to keep in mind. 

• The less you put down, the higher your monthly mortgage payment. Your loan balance will be larger, plus you’ll likely pay a higher interest rate.

• In highly competitive real estate markets where bidding wars are the norm, a low down payment can make your offer less attractive to sellers.  

• If you put down less than 20%, you’ll likely have to pay private mortgage insurance. 

Private mortgage insurance 

Speaking of private mortgage insurance (PMI), it’s generally required for buyers putting down less than 20% while using a conventional loan. PMI typically costs between 0.5% and 1% of the loan amount annually. The good news is, you can drop PMI when you reach 20% equity (that’s your share of ownership).   

Minimum down payment by loan type

Wondering how you can take advantage of low down payment options? The type of loan you choose can set the tone. Here are the minimum down payment amounts for the most popular loan types.

• Conventional loans: 3%

• Federal Housing Administration (FHA) loans: 3.5% 

• United States Department of Agriculture (USDA) loans: 0%

• Veterans Affairs (VA) loans: 0%

Note that buyers with lower credit scores may have to make larger down payments to cover any added risk to the lender. 

Home inspection and appraisal

The home inspection and appraisal are two more expenses you’ll need to think about when buying a house. 

The inspection is optional, though usually encouraged. It allows you to learn more about the home’s condition and any repairs needed before you finalize the purchase. A home inspection normally runs between $300 and $500, but can be more depending on where you live and the type of home. 

Meanwhile, an appraisal is required by the lender to determine the value of the home. The appraisal generally costs between $300 and $450, though they can cost up to $900 for some buyers. 

In some cases, the buyer may also need additional money on hand to cover an appraisal gap. That's when the appraised value comes in below your offer price. Let's say you offer $375,000 for a home, but the appraiser determines it's worth $365,000. The lender isn't going to loan you more than the home is worth, so you may need to renegotiate with the seller, cover the difference, or walk away from the deal entirely.

Closing costs 

Closing costs are one-time fees you pay on a home purchase. They include things like lender fees, title fees, transfer taxes, prepaid mortgage interest, and more. All together, closing costs tend to add up to 2% to 5% of the loan amount. 

Bear in mind that closing costs can vary by lender. Some fees, such as prepaid property taxes, need to be paid no matter what. Others, like lender fees, are entirely optional and up to your mortgage company. It can really pay off to shop around and compare estimates from multiple lenders when the time comes.   

Moving expenses 

One expense buyers often underestimate? Moving costs. For the typical 2- to 3-bedroom home, a local move costs an average of $1,250 while a long-distance move averages $4,890. Some moves can cost upwards of $15,000. 

It’s hard to predict exactly how much your move will cost without getting an estimate. That’s because moving costs range widely based on a host of factors, including location, home size, time of year, and whether you need any special services. For instance, if you need a moving company to pack for you, that will cost extra. If you do all of the packing and moving yourself, and only rent a truck, you can save substantial money.  

All in all, you likely won’t be able to spend less than $1,000 on moving expenses — and that’s if you’re staying local.

And don’t forget about the expense of new furniture to fit your future home, plus any repairs or cosmetic upgrades you’ll need to take care of. Furnishing a home costs an average of $16,000, though it can cost far more or less depending on your tastes, and the size and location of the home. 

How long does it take to save for a house?

With home prices at an all-time high, saving for a house can seem like a fool’s errand. 

A recent study by Mint found that it takes the average American household 51 months, or 4.25 years to save for a 20% down payment. Though in more expensive states like Hawaii, that timeline could more than double. And that’s to say nothing of closing costs, moving expenses, or furnishing a new home. 

However, the good news is, most buyers don’t put 20% down. And waiting to buy until you reach the mythical 20% number could lock you out of homeownership entirely. Since 2020, home prices have outpaced what many Americans are able to save for a down payment. But that doesn’t mean you’re out of luck. It just means you need to be diligent, and set realistic expectations. 

Perhaps you could explore low down payment options, so you can focus on saving for all of the other expenses that come with a home purchase. 

Wrapping up

The bottom line? Saving for a home isn’t one-size-fits-all. But at a minimum, you’ll likely need to set aside:

• 3% for a down payment

• 2% to 5% for closing costs

• $300 to $500 for inspection

• $300 to $450 for an appraisal

• $1,000 for moving expenses

• Optional budget for furniture, repairs, and upgrades

There’s a lot to consider, and your target savings will depend on your unique situation, including your income, home budget, credit score, long-term financial goals, and more. 

The key is to know your costs, make a plan, and keep your ultimate goal in mind — finally owning that brand new dream abode.