How Much Money Should I Save Before Buying a House?

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Before buying a house, make sure you’ve saved enough for a down payment and closing costs and fees. You’ll also want a reasonable amount left in your savings after the purchase in case you need to make unexpected repairs or take care of an emergency.
It can be hard to know where to start when saving to buy a house. A home purchase is one of the biggest investments you can make in your life, so it’s important to make sure you’re informed about the costs involved before doing so. 
Courtesy of insurance broker and comparison app Jerry, here’s a look at what you should be saving to buy a house.

What savings are needed for a home purchase

When you’re buying a home, you may look at the listed price and have a bit of sticker shock. While that’s totally normal, you won’t be paying all that money at once. Most people take out a mortgage to finance a house purchase and pay back the loan over time.
However, you will need to pay a portion of the costs upfront. This includes a down payment, closing costs, and other various expenses. The amount you’ll need will vary depending on the value of the home
Here’s an example of how much money a $250,000 home purchase might require:
Home purchase price$250,000
Down payment (10%):$25,000
Closing costs (3%):$7,500
Cash reserves (2 months of living expenses):$4,000
Total:$36,500
Here’s a more detailed breakdown of what money you will need on hand. 

The down payment

Your home’s down payment is one of the major components of purchasing a home, but not the only one. The down payment is the amount of money you’ll pay upfront to go toward the purchase price of your home, while the rest will be covered by your mortgage.
Depending on the type of mortgage you’re using to help pay for your home, the requirement for the minimum down payment may vary. 
Some options will allow you to put a smaller amount down, like 5% of the home’s purchase price, but this often comes with the requirement that you also pay private mortgage insurance (PMI), which would increase your monthly mortgage payment. To avoid paying extra for private mortgage insurance (PMI), you’ll need to have enough saved for a 20% down payment, which is a common requirement for conventional loans.
In addition to private loans, there are also some federal home loans with lower down payment options:
  • Federal Housing Administration (FHA) loan: This loan is available for homebuyers with low to moderate incomes and is commonly used by first-time homebuyers. It requires a minimum 3.5% down payment.
  • Veterans Administration (VA) loan: This loan is available to veterans, active service members, and eligible surviving spouses. No down payment is required for this loan, as long as the purchase price doesn’t exceed the value of the home. It also has lower interest rates and closing costs.
Key Takeaway The type of loan you secure will dictate how much money you need to put toward your down payment. 

How you can (and can’t) fund a down payment

As you apply for a mortgage, your lender will be highly scrutinizing your finances, and they’ll want to know how you’re sourcing funds for your down payment.
It’s not uncommon for family members to gift a home buyer funds for a down payment. Depending on your lender, however, it may be required that a certain percentage of the down payment is coming from your own funds
That’s largely because they want to feel confident that you can still afford your home on your own without needing financial help from others.
In most cases, you can’t secure a down payment with a personal loan to qualify for your mortgage because this doesn’t demonstrate strong financial security to your potential lender. Plus, it’s not a good idea since it saddles you with additional debt.

Do you have to use a mortgage to buy a house?

No, you don’t have to use a mortgage to buy a home. Considering most homes’ price tags, however, it’s most common for homebuyers to seek out a mortgage to help fund the purchase.
If you already have enough funds on your own, though, there’s no requirement for you to get a mortgage. One stipulation is that you can’t use cash to buy a house. The funds have to pass through a financial institution to be traceable and verifiable.

Closing costs

Your down payment will usually be the biggest part of your home purchase on your end, but don’t forget about closing costs! In some cases, the extra funds you’ll need here can make or break your ability to buy your dream home.
Closing costs can vary depending on your state and lender, as well as other conditions of the purchase, but they often fall somewhere between 2% and 5% of your home’s purchase price. 
In some cases, you can negotiate for the home’s seller to cover closing costs for you.

What do closing costs cover?

What closing costs include will vary, but they commonly include:
  • Appraisal fee
  • Home inspection fee
  • Realtor fee
  • Title search
  • Title insurance
  • Attorney fees
  • Property taxes
  • Utility adjustments
  • Homeowners association fees
Different types of mortgages may include different fees, which are also usually paid at closing.

Cash reserves

Your lender doesn’t want you to empty your entire savings on your home purchase (and you shouldn’t, either). They want to feel confident you’ll be able to make your monthly mortgage payments, as well as cover any unexpected costs if something in your home ends up needing a repair.
A good rule of thumb is to have two months’ worth of mortgage payments in savings when all is said and done, although it will depend on your lender’s requirements. 

Other costs

Depending on the circumstances of your home purchase, you might have additional miscellaneous expenses. 
These could include paying for movers or a moving van. You might have bought your home knowing certain repairs will need to be made. You may be handed the keys, walk into your new home, and realize you have some cleaning up to do before moving in your things, so you might need to run an errand to get some supplies. 
In most cases, these costs will be much smaller than your other expenses, but you still want to be prepared for them, just in case.

Finding the right home insurance

Another important aspect of searching for the right home is finding the right homeowners insurance policy to match. If you’re using a mortgage to purchase your home, it’s likely that your lender will require you to have home insurance, too. 
Unsure where to start? Jerry can help you find and compare competitive quotes from top insurance providers like Progressive and Allstate. Jerry can even help you bundle with your car insurance for even more savings. Even better, getting started takes less than a minute!
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FAQs

How much you’ll need for a down payment depends on the terms of your mortgage, but a conventional loan will often require a 20% down payment.
While using a mortgage to buy a home is extremely common, if you already have enough funds to purchase a home, it’s not required.

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