When you want to buy a house, you typically need money for a down payment and closing costs. You might need money to pay for repairs and moving expenses too. If you don’t have this money – check out our step-by-step guide to saving for a house!
Step 1: Set a budget you can afford
A great first step is to decide how expensive a house you can afford to buy. Think about how much you can afford based on both the total cost of buying the home and the cost of the monthly payments. Our calculators can help you do it.
Home affordability calculator
Estimate the prices of homes you can afford to buy.
Mortgage payment calculator
Estimate how much you might pay monthly on your home loan.
These calculators can help you better understand the total cost of buying a home. You will need to pay some of these costs at closing, which is why you need cash in hand to buy a house. Many others you can finance into your mortgage and pay over the life of the loan.
Step 2: Choose a down payment
Your down payment is often the biggest single expense you need to pay in cash at closing. Which means it is frequently the most important part of your savings plan! Think about these two things:
First, consider the minimum down payment you will need. If you are eligible for a VA loan, you can often buy a house with no down payment. FHA loans usually require a minimum down payment of 3.5% of the purchase price of the home. For a conventional loan, lenders typically require a minimum down payment of 5% of the purchase price.
Second, think about whether you want to make more than the minimum down payment. A larger down payment might help you get a better rate or better terms because mortgage lenders often view homebuyers who make larger down payments as lower risk customers.
Making a larger down payment means you are borrowing less money to buy the home, which can help you save money on interest payments over the life of the loan.
If you get a conventional loan, a larger down payment can help you lower how much you pay for private mortgage insurance (PMI) because you are paying PMI for a shorter period of time. If you make a 20% down payment or more with a conventional loan, you can avoid paying for PMI all together.
Step 3: Estimate your closing costs & cash to close
When you buy a home, the closing costs can often add up to between 3% and 6% of the purchase price. For example, if you buy a house for $300,000, you might pay between $9,000 and $18,000 in closing costs. Learn more about closing costs.
However, you don’t always need to pay the full amount of these closing costs in cash at the time you close on a home. Many times you can finance some closing costs into your mortgage and pay them as part of your monthly bill. This lowers the amount of cash on hand you need at closing. However, it does increase the size of your mortgage and the amount of interest you will pay over the life of the loan.
Step 4: Estimate costs for moving, remodeling, and repairs
Moving into your new home costs money, so include an estimate of this expense. Many homes need remodeling and repairs, and it is easier to have this work done before you move into the house rather than after. So think about savings for these expenses as well.
A sample estimate of your savings goal
Let’s say you decide you can afford to buy a $300,000 house with a 10% down payment and cash needed to close equaling 3% of the purchase price. Also say you budget $5,000 for moving and $10,000 for repairs. This means your savings budget to buy a house would be $54,000. Check out this table:
| Down Payment (10% of 300,000) | $30,000 |
| Cash to close (3% of $300,000) | $9,000 |
| Moving expenses | $5,000 |
| Repairs | $10,000 |
| Total | $54,000 |
Step 5: Decide how fast you want to reach your savings goal
It is easier to save $54,000 in three years than it is to save it in one year. Think about how quickly you want to reach your savings goal and have the money you need to buy a house. How fast you can reach your goal is affected by your income, your monthly expenses, your lifestyle, and more.
Step 6: Look for bigger ways to save money
Housing costs, car payments, and vacations are three major expenses you can often control. If you are renting, think about moving to a less expensive apartment. If you own a car, put off buying a new or newer vehicle while you are saving for a house. This can help keep your car insurance lower too. For vacations, look for cheaper choices closer to home or think about a “stay-cation” instead.
Financial professionals generally recommend you pay down debts, especially high-interest debts, before you save for expenses like buying a home. If this describes you, think about paying down debt first. This may also improve your credit score and finances, which can make it easier for you to get approved for a mortgage, possibly even at a lower rate.
Step 7: Look for smaller ways to save money
It is easy to spend a lot of money on restaurants, clothing, and entertainment. Add up how much you typically spend on these expenses and then set a lower budget for yourself. It’s possible to eat well, look good, and have fun while spending less money to do it.
There are also lots of little expenses that can add up to big money when you put them all together. Check out these ideas:
- If you are buying coffee or breakfast in the morning, make these at home instead. The same goes for lunch. Pack lunch instead of buying it!
- Cut the cord on expensive cable TV packages and land-line phones. Look at your bills for internet access and determine if you can save money by bundling your internet, TV, and phone services.
- Review your monthly subscriptions to music, movie, news, and other online services as well as gym memberships and fitness classes if you aren’t using them.
- Cook more meals from scratch. You can lower your grocery bills by buying more ingredients for meals you cook and fewer packaged foods and meals.
Step 8: Make saving for a home automatic
When you are paid by direct deposit, it is often possible to send a portion of your paycheck into a savings account rather than a checking account. This is a great way to save money!
When you are saving for retirement, think about reducing your contributions while you’re saving for a home. Look at the big picture first, however. If your employer matches contributions, find out what you need to contribute to take full advantage of the match. Generally speaking, it is better not to borrow from a retirement account to get money for a down payment because you often have to pay penalties and taxes when you do.
Step 9: Check the value of your current home’s equity
When you own a home, the value of your home’s equity can be an important source of money for your next home. Your equity is equal to the current value of your home minus the amount you owe on your mortgage and any other home loans you may have. For example, if your home is worth $325,000 and you own $250,000 on your mortgage, you have $75,000 in equity.
Keep in mind that selling a house comes with costs such as real estate commissions that will reduce the amount of money you may get. Consider these costs when estimating the value of selling your home!
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only and are not investment or financial advice. Consult a financial advisor before making important financial decisions.
Last reviewed and updated October 2022 by Freedom Mortgage Corporation.
