How Much Money Should I Save Before Buying a House?
Think you’re ready to buy a house? See how much you should save before buying.
Contributing Writer at Tally
December 20, 2021
The homebuying process can be overwhelming, especially for first-time homebuyers. When you start to consider the numbers surrounding a mortgage and its seemingly endless fees, you may need some help determining how much money you should save before buying a house.
Most buyers already know about the down payment, but there are additional costs associated with buying a home. Below, we answer the question, "How much money should I save before buying a house?" — in-depth, including several loan scenarios.
Rule of 20% for conventional financing
The golden rule of personal finance when buying a new home with a conventional loan is to save at least 20% of the home's purchase price as a down payment. So, if the home costs $300,000, you should put $60,000 down.
Keep in mind, this is only the down payment and doesn't include other upfront expenses, like appraisals, closing costs and others. These will add to the amount you need to save to buy your home.
Other upfront loan costs to consider
On top of the down payment, there are other costs and fees associated with taking out a mortgage. Yes, you can roll some of these costs into the loan, but then you're impacting the 20% down payment, as the loan will be more than 80% of the home's value.
These are the fees the lender charges the borrower for making the loan. Some mortgage lenders will itemize the various components of the fees, but many note it as a single line item. The fees included under this umbrella term are:
The exact cost varies by the mortgage lender, but you can expect to pay up to 1% of the buying price in origination fees. So, on that $300,000 home, you can expect $1,000 to $3,000 in origination fees.
Buying points means paying money upfront to lower your interest rate. It can also go the opposite direction, and you can take a discount for an increased interest rate. Because this isn't mandatory, this fee can be as low as 0%. However, it can also reach 1% of the home's sale price.
So, on a $300,000 home, you’d be looking at $0 to $3,000.
When deciding whether or not to buy points, sift through the loan terms to ensure the amount of interest saved by lowering the interest rate exceeds the points. Because mortgages are typically 30 years, you’ll likely save money by buying points.
Processing and underwriting fees
These fees cover the people who gather all the documents and coordinate with third-party vendors. They also manually review the future homebuyer's loan application for approval. This fee varies but usually falls in the $300 to $900 range.
Title search and title insurance
When you purchase a home, the lender must verify the house can legally be transferred to you. They confirm this via a title search. This fee can cost anywhere from $300 to over $2,500.
This covers the cost of securing the third-party escrow company that handles the funds involved in the home sale. This fee ranges from $350 to over $1,000.
This is the fee to have a third-party appraiser come and estimate the home’s fair selling price. This fee runs from $500 to $1,000 or more.
Prepaid expenses and deposits
You generally have to pay six months to a year of property taxes and homeowner's insurance upfront to secure a mortgage. This will vary according to your area’s real estate tax rates and insurance costs, but you can expect to pay $1,000 to $4,500.
Total savings for a conventional loan
On a conventional loan, you’d need to save $63,600 to $75,900 (based on the $300,000 home example). This price would vary based on the lender and where their fees land on the scale. These savings include the down payment and all the estimated closing costs.
Again, you can roll some costs into the loan, but this could mess with your loan ratio and result in a higher mortgage payment.
How an FHA loan impacts your savings
Federal Housing Administration (FHA) loans are options for buyers who may be tight on money, as it requires only a 3.5% down payment from the buyer based on the price of the home. So, at $300,000, you'd only need to put $10,500 down.
The only issue is, FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the loan value. Plus, you'll pay private mortgage insurance tacked onto the monthly mortgage payment for the life of the loan unless you refinance out of it.
So, if you buy a $300,000 home and put $10,500 (3.5%) down, you have a $289,500 loan, meaning upfront MIP will cost you $5,066.25 on top of the other fees above.
If you opt for an FHA loan, the 3.5% down brings your savings requirements way down. With the other fees listed above and a 3.5% down payment, you'll need to save $12,866 to $25,166 for a $300,000 home. Like the conventional loan, you can roll some costs into the loan, increasing your monthly payment.
How a Veterans Affairs (VA) loan impacts your savings
If you or your spouse were in the military, you likely qualify for a VA loan, which requires no down payment and no mortgage insurance. There is, however, a VA funding fee of 1.4% to 3.6% of the loan amount.
At the $300,000 mortgage amount, you're looking at $4,200 to $10,800 on top of the other fees listed above. Combine these numbers with the additional fees above, and you'll need to save $7,800 to $26,700.
How a USDA loan impacts your savings
Designed to help rural areas grow and lower-income families secure homes, a USDA loan offers a 0% down payment. Like the upfront MIP on an FHA loan, a USDA loan requires a 1% upfront mortgage insurance fee based on the mortgage loan amount. For a $300,000 mortgage, you'd pay $3,000 in upfront mortgage insurance.
Combine this with the other fees above — minus the down payment — and you need to save $6,600 to $18,900.
Steps to saving for buying a home
Homeownership can be rewarding, but it's also very challenging — especially when you need to save thousands of dollars to make a home purchase possible. Fortunately, you can take some clearcut steps toward saving that amount.
Creating a budget surplus
First, create a budget surplus. Without it, you're just barely meeting your monthly obligations and have little left to save. Run through your monthly budget and find any expenses you can reduce or cut altogether.
Have a few streaming subscriptions you never watch? You can cut some of those to save some cash.
How about your cellphone bill? Perhaps you can downgrade your unlimited data plan for a metered data plan. Just remember, nothing is too small to trim, and every dollar matters when you're saving.
Once you've created a budget surplus, make a note of this number because you'll use it a few times.
Pay off high-interest debt
Few things can squash your savings quite, like high-interest credit card debt. Create a plan to rid yourself of this interest-hungry nuisance for good. There are a few tried-and-true methods to pay off debt, including:
Debt avalanche: Focusing on the highest-interest debts first for maximum interest savings
Debt snowball: Focusing on the lowest-balance debts first for quick wins
Line of credit: A lower-interest revolving credit line you can use again and again to pay off debts
Debt consolidation: A lump-sum loan with a lower interest rate that allows you to roll all your credit card balances into one monthly installment loan
With your high-interest debt cleared, you'll not only improve your credit score, perhaps helping land a lower mortgage interest rate, but you'll increase your surplus cash with the minimum credit card payments gone.
Review your budget again once you’ve paid off debt, adding the surplus from paying off debt to the original surplus above. Note this number as your new surplus.
Calculate your goal date
Determine the type of mortgage you plan to get and note the high and low savings amount you need for that type of loan. Divide the higher of the two estimated savings amounts you'll need by the surplus above to determine the number of months it’ll take to save to buy a house.
For example, if you had a $1,000-per-month surplus and planned for a conventional home loan on a $300,000 home, your high-end estimate would be $75,900. At $1,000 per month, you're looking at about 76 months or 6.33 years.
Yes, you may end up on the lower end of the fee range, but it helps to overestimate and use excess cash to furnish the home as a higher down payment.
That seems like a long time, but you can always check rates when you reach the lower range and see if you can find an inexpensive lender at that time.
Alternatively, you can switch to a loan option with a lower down payment requirement, like an FHA loan. However, your monthly payment may be significantly higher with the lower down payment and PMI on the FHA and USDA loans.
Save that surplus
With your budget surplus, you can open a new high-yield savings account (HYSA) and start tucking away your money to build a healthy cash reserve. If you're on a long-term savings plan, like the six-year plan above, you may even consider placing some cash in certificates of deposit (CDs) once you hit certain milestones.
For example, at each $10,000 milestone, you may decide to place that money in a one- or two-year CD to take advantage of the extra interest. You can keep rolling the money into a CD until it's finally time to buy that house.
But make sure to time the CDs right, as you don't want to find your dream house only to learn you'll get hit with a penalty for an early withdrawal from your CD. You can plan for the CDs to mature six months to a year before your expected home purchase date. Then, you can place the cash back in your HYSA for safekeeping until it’s time to buy your home.
So, how much money should I save before buying a house?
How much you should save depends on many variables, ranging from the price of the home to the type of loan you plan to use and more. With the process outlined above, you can get a rough estimate of the high and low amount of savings you'll need to buy a house.
Once you've calculated that number, you’ll want to save until you reach that number, using a high-interest savings account to your advantage.
You can avoid rolling too many costs into your loan by saving the right amount. Also, you'll keep your monthly payment as low and affordable as possible moving forward.
If you're struggling with the debt repayment portion of your savings plan, the Tally† credit card debt repayment app can help. The app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to pay off higher-interest credit cards efficiently.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.