Saving for a home is a major financial goal, but not an impossible one. Future homeowners have several costs to estimate, including a down payment and closing costs. Understanding the breakdown of these fees and how different types of mortgages impact them is the first step toward figuring out how much to save for a house. From there, it takes consistency and dedication to continually divert extra cash each month into a house fund.
What is a down payment?
A down payment is often the largest expense a future home buyer needs to save for. It’s a percentage of the total purchase price that the buyer pays upfront, in cash. The remaining amount is usually covered by a mortgage (unless the buyer is paying all cash).
Most mortgages come with a minimum down payment. When creating a savings plan for a house, aspiring buyers create a ballpark estimate of down payments early on in the process.
The size of a down payment needed for a home depends on the type of mortgage a buyer gets, and on the particularities of their local real estate market.
- Conventional loan: 5% to 10%
- Investment properties, second homes, competitive real estate markets: 20%
- Special mortgage loans (often for first-time homebuyers who meet certain income limits): 3%
- Government-backed loans: 0% to 3.5%
Do I qualify for a government home loan?
Getting a government-backed mortgage often comes with a lower down payment and flexible credit score requirements. Buyers interested in a government-backed mortgage will want to know the requirements for each of the following options.
A mortgage insured by the Federal Housing Administration from one of their approved lenders can come with a 3.5% down payment for eligible applicants who have a minimum credit score of 580. The down payment jumps to 10% for those with a credit score between 500 and 579.
Veterans administration mortgage
VA loans come with no money down, but home buyers must meet one of the following military service requirements:
- Active duty service members
- Surviving spouses of veterans
- Reserve or National Guard members
This is another 0% down payment option from the U.S. Department of Agriculture. The home must be located in a designated rural area and applicants must meet specific income limits.
Rates and eligibility requirements may be competitive with these government-backed loans, but there are often other fees not typically found with a conventional mortgage.
Strategies to save for a down payment
The best way to save for a house is to create a savings goal and a timeline. Once a home buyer has an idea of the size of down payment they’ll make and their target price point, they can easily create a savings goal.
For instance, a $300,000 house with an FHA loan’s 3.5% down payment would require $10,500. If their goal is to buy a home in a year, they would need to set aside $875 per month to reach that goal. Here are some other strategies home buyers can use to save for a down payment.
- Cut back on monthly spending. Buyers can shave off unnecessary expenses each month, scaling back in a certain budget category or committing to saving a certain percent of their monthly take-home pay.
- Boost income. It’s easier for home buyers to save more by earning more. Plus, that helps them qualify for a larger mortgage. Starting a side hustle is one way to increase monthly income.
- Put windfalls toward a down payment. Buyers can save a huge chunk of their down payment by earmarking tax refunds, bonuses, and inheritances for this savings goal.
- Pause major splurges. Money usually used for big expenses like a vacation or new device could be set aside. Instead, future homeowners could divert those funds to a down payment and easily add a few grand.
Do I need to save for more than a down payment?
A down payment isn’t the only cost a home buyer must consider. Here are some other expenses that should be calculated before someone starts shopping for homes seriously.
Private mortgage insurance
Private mortgage insurance (PMI) is usually charged on conventional mortgages with a down payment of less than 20%. It can be paid upfront at closing or stretched out across the mortgage payments.
- Conventional annual premium: 0.5% to 1% of the loan amount
FHA loans come with a mortgage insurance premium (MIP) that is charged both at closing and on an annual basis.
- FHA upfront premium at closing: 1.75% of the loan amount
- FHA annual premium: 0.80% to 0.85% of the loan amount
Appraisal and inspection fees
Buyers are responsible for both an appraisal and the inspection. An appraisal is required by the lender to confirm the value of the home (it can’t be worth less than the mortgage). A buyer may also order inspections, including a general home inspection, as well as specialized ones, like a chimney, septic, and/or well inspection. These are either paid out of pocket or at closing. Costs vary depending on where you live and the size of the home you’re buying. In most places, an appraisal costs between $300 and $500. A standard home inspection is usually in the $300 to $700 range.
Other closing costs include things like lender fees, attorney fees, title expenses, credit reporting fees, and more. Buyers receive a loan disclosure document from the lender outlining estimated costs. Most buyers can expect to pay between 2% and 6% of the sales price.
What should I do before saving for a down payment?
Saving up for a down payment is one of many important financial goals in life. Before a future homeowner invests in such a large purchase, it’s important to have a strong financial foundation. For instance, an emergency fund is important to have, and is usually recommended to cover up to six months of expenses. If someone in the family loses a job, there’s plenty of cash on hand to continue paying the mortgage.
Paying off high interest debt can help buyers qualify for a mortgage, since all debt obligations are considered as part of the mortgage application. Too much debt could limit the amount a buyer may borrow for a home. High credit utilization can also lower a buyer’s credit score. That leads to a higher interest rate and, ultimately, a higher monthly payment. While taking care of these goals first could delay home ownership, they do put buyers on stronger financial footing in case of an emergency.
Where can I put my money for a down payment?
Part of learning how to save money for a house is choosing a place to actually store the funds. Low-risk accounts are typically preferred, especially with a short time horizon for actually using the money.
- High-yield savings account. These are typically insured up to $250,000 and may earn a bit of interest. It’s also easier for future home buyers to automate their money to transfer from a checking account to a savings account.
- Money market account. Some banks offer higher rates on these than their standard savings accounts. But these accounts may also come with a higher minimum balance.
- Certificate of deposit (CD). Buyers who are confident in their timeline for buying a home may also consider putting some of the funds in a CD. These sometimes have better rates, although the funds are locked in the account until a set maturity date. Early withdrawals will be subject to a penalty. The longer the CD term, the higher interest rate the account holder receives.
The bottom line
Purchasing a home is an exciting milestone in life, but it takes some planning to get there. Future homeowners can get a sense of how much cash they’ll need to buy their dream home, including a down payment as well as other closing costs. In the meantime, they may want to pay down debt and build a solid emergency fund so they’re financially secure on closing day and beyond.