Cash News
Congratulations on deciding to buy a house. Now, it’s time to create your savings plan. This process can help you streamline your current budget to buy a house sooner, and you may even qualify for down payment assistance from a government entity or private program.
We’ll discuss the basic financial factors you should consider as you start the process of saving for a house, such as how much you may need for a down payment and closing costs. Then, we’ll walk you through easy-to-follow steps for how to save for a house.
Read more: Best mortgage lenders for first-time buyers
In this article:
Can you afford to buy a house?
Down payment
Closing costs
Down payment assistance
7 steps to saving for a house
FAQs
Can you afford to buy a house?
Start by reviewing your budget to see how much money you can realistically set aside for buying a home. You should also consider how to prepare your budget for new expenses as a homeowner.
“If your monthly finances aren’t working as a renter, they won’t be any better as a homeowner,” Danielle Bridges, senior vice president of mortgage lending and capital markets at Vantage West Credit Union, said.
For instance, if you currently pay some expenses as a renter on your credit card because your paycheck isn’t enough, this may be a sign that you aren’t ready to buy a house yet. You may need to cut your budget or get a side hustle to afford a home. Your bank or credit union may have free financial counselors to help you sort through your finances and improve your budget.
Learn more: Should you rent or buy a home?
Down payment
Minimum down payment requirements vary by mortgage loan program and lender. For instance, VA loans don’t require down payments for eligible veterans, service members, or surviving spouses. FHA loans only require a 3.5% down payment if your credit score is 580 or above.
Conventional home loans might require higher down payments depending on your finances, but it’s becoming more common to be able to put down 3% on a conventional mortgage. Some lenders even offer 1% down programs.
Bridges said more credit unions are rolling out conventional mortgage loans with 0% down payments — credit unions generally have lower default rates, so they are more willing to take the risk.
Closing costs
In the United States, closing costs such as title insurance, appraisal fees, attorney fees, and home inspections add an average of $4,243 to the cost of owning a home.
Closing costs total about 1.87% of the median home value in the U.S. Based on these numbers, a $300,000 home’s closing costs could be about $5,600, and closing costs would increase by about $1,900 per $100,000 borrowed. Thus, you should save roughly $9,400 for closing costs on a $500,00 home.
Dig deeper: Your home inspection checklist — What to expect on inspection day
Down payment assistance
Several types of down payment assistance programs are available that may reduce the amount you need to save for a house. Down payment assistance programs are usually for low- and middle-income borrowers and are available with a variety of organizations. Savings account matching programs are from credit unions and banks, and there isn’t always an income limit.
Down payment assistance may be available from nonprofit organizations, banks, credit unions, or your state or local government. The best way to learn about ones offered in your area is through an internet search, adding the words “down payment assistance” to find resources, or asking the mortgage service officer, said Bridges. Asking a mortgage officer to help you navigate the process can be invaluable for receiving down payment assistance because you often have to meet additional requirements, such as staying in your home for a specific number of years.
With a savings account matching program, you open a dedicated savings account to save for a home, and your bank or credit union matches the amount. For instance, a bank could deposit $1 into your account for every $1 you put in, for up to $3,000 in assistance. The bank or credit union could set any amount for the match.
Bridges said to ask your local bank or credit union about savings matching programs for home ownership. You should also read all terms before choosing a savings account matching program.
Dig deeper: First-time home buyer programs — Everything you need to know
How to save money for a house: 7 simple steps
Bridges suggested cutting monthly expenses as a valuable tactic for finding extra cash for a home. In an email, she gave an example of getting an FHA loan on a $300,000 home, meaning you would need a 3.5% down payment of $10,500. In her example, she suggested reducing dining expenses. However, you could also slash expenses in other budget areas by negotiating bills such as cable, internet, cell phone, and renters or auto insurance. We’ll use both methods in our step-by-step instructions.
Step 1: Identify the expense to cut or negotiate
Let’s say you decide to cut back on dining out to save money. You currently spend $300 per month on dining out. You may also look at your expenses and see you are spending $80 monthly on your cell phone — but you know friends who only spend $30 monthly.
Step 2: Set a goal
In this example, your savings goal is to save $10,500 for a 3.5% down payment on a $300,000 home. You also might decide you want to buy a house within three years.
Step 3: Calculate the savings needed
Divide $10,500 by the amount you intend to save each month. By saving $300 monthly, you’ll have the cash saved in about three years.
Dig deeper: What percentage of your income should go to a mortgage?
Step 4: Implement the expense cut
Instead of spending $300 per month on dining out, you reduce it to $150. You could do this by cutting the number of times you eat at restaurants, using coupons, or skipping some appetizers and drinks. With $150 left per month to save, you compare your cell phone bill to your friends’ and are able to get on a similar phone plan for $30 monthly. By lowering your bill from $80 to $30, you’ve now added $50 per month to your home savings. You’re searching for another $100.
Then, compare or cut another expense as you review your budget. Setting aside an hour or two to review your budget can make the nearly three-year process of saving for your down payment much smoother. For example, you might be able to get a car insurance discount by bundling your auto insurance and renters insurance.
Step 5: Automatically transfer the money into your savings account
Take the $300 saved each month and put it directly into your down payment savings account. Setting up automatic transfers from your checking account to a savings account can help keep you accountable.
Step 6: Monitor progress
Check your savings account every few months to watch the money add up. With a high-yield savings account, your savings will grow even faster than you might have expected.
Read more: Best time of year to buy a house
Step 7: Find additional strategies to reach your goal
Reducing as many expenses as you can comfortably manage is a great way to reach your goal more quickly. Consider utilities, insurance providers, and any subscription services you don’t use.
You can also look for ways to earn more income and then put that extra income into your house savings account. For example, consider taking on a side hustle or asking for a raise at work.
“Any unexpected windfalls, such as tax refunds or bonuses, can be directed toward your down payment savings,” said Bridges. If you receive extra money you hadn’t factored into your budget, put it toward the house.
By finding more ways to save, you may be able to save more than $300 per month. This could give you a head start on saving for closing costs or even help you buy a home sooner — which can be great news if you’re worried about rising house prices in your area.
Learn more: Why are home prices so high?
Savings for a house FAQs
What is a good amount to save for a house?
The exact amount depends on the home, mortgage value, and closing costs. If you’re considering a conventional loan, start with 3% of the home value for a down payment, and estimate another 1.87% to cover closing costs.
How much should I save for a $500,000 house?
According to a 2022 study by the National Association of Realtors, the typical down payment for first-time home buyers was 6%. On a $500,000 house, this would come to $30,000.
How long does it take the average person to save for a house?
The answer varies based on income, size of home, what individuals are willing to cut back on in their budget, and the down payment requirement. According to Redfin, if a typical millennial saved all of their disposable income, they could save for a 20% down payment on a median-priced home in four years. But keep in mind that a 20% down payment is not necessary to buy a home — so you could afford one even sooner.
Is it better to save for a house or save for retirement?
It’s typically wise to prioritize retirement savings, but if you’re financially able, create a plan to save for both retirement and a house.
This article was edited by Laura Grace Tarpley