Here’s How Much To Save For A House

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5. Home Furnishings

Unless you plan to rely on hand-me-downs or use your furniture from your previous home, you’ll need to budget for new furniture. You might also prefer to replace the struggling refrigerator or laundry set you inherited from the previous homeowner.

That’s why people who buy a newly built home spend an average of at least $4,500 more in the two years after closing on the house than a similar non-moving homeowner, according to a study conducted for the National Association of Home Builders. For those moving into an existing home, they spent an average of $4,000 more than a non-moving homeowner.

If you’re looking to furnish your home with the help of a designer, it will likely cost about $14,000 on the low end and more than $100,000 on a luxury budget, which adds thousands more to your initial home costs. And that’s just the furnishings. You should also consider whether appliances need to be replaced, especially if you’re revamping your kitchen or bathroom, replacing laundry sets and buying smaller appliances.

If you don’t plan on working with a designer, you’ll want to prioritize your most important furnishings, estimate the costs and put aside as much as possible for those items.

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Home costs to budget for

The down payment: 3% to 20% of the purchase price

You may have heard the “conventional wisdom” that you should put down 20% of a home’s purchase price as a down payment. However, due to modern hurdles of ownership like student loan debt, credit card debt, and car loans, it’s no longer feasible for every potential homeowner to make a 20% down payment. That amount is still recommended, but most buyers in 2020 saved only 12% of the home price as a down payment.

The Federal Housing Administration (FHA), some commercial lenders, and the Department of Agriculture all offer mortgage loans if you’re able to put as little as 3% down. If you qualify for a loan from the Department of Veterans Affairs, you may be able to put no money down. The Consumer Financial Protection Bureau (CFPB) notes that conventional loans with private mortgage insurance (PMI) can require 5-15% down, which would be $15,000-$45,000 on a $300,000 home.

There are tradeoffs to using these types of loans, however. For once, you’ll start off with less equity in your home and will have to make a higher monthly payment. For another, you might have to pay mortgage insurance and additional fees for such a low down payment.

When thinking about a mortgage, it’s a good idea not to buy a home with a monthly housing payment that costs more than 25% of your monthly take home pay. Include in that 25% the principal, interest, property taxes, homeowner’s insurance and, depending on the home, PMI and homeowners association (HOA) fees. You’ll know all of these applicable fees before signing any paperwork, so you can calculate based on your take-home pay.

While you don’t need the 20% down payment that you did 30 years ago, you shouldn’t just jump at the most expensive home you can get approved for with the budget you have. It’s still a good idea to make a down payment of at least 10% to get a more favorable monthly payment and avoid falling behind on rent payments or risk foreclosure.

Home inspection: $500 or more

Home inspections protect the buyer and lender by identifying issues in a house that might have been through a casual stroll. Sometimes, home inspections costs factor into the closing costs but, unless it’s specified that this is the case, you might need to pay out of pocket. A home inspection can cost a buyer more than $500.

Closing costs: 2% to 5% of the purchase price

When buying a home, closing costs are the expenses paid to complete the home purchase, including loan fees, initial property tax and homeowners insurance payments, title fees, and depending on where you live and the situation, attorney’s fees and home inspection costs.

Closing costs vary widely by state and loan type, but they tend to be 2%-5% of a home’s purchase price. In some instances, a home seller may help offset these costs, but for your own protection, you should budget about 5% of the home’s price for closing costs.

Moving expenses: $1,000 or more

Once you purchase the house, the expenses don’t stop. 

You still have to move, and even if you’re renting a truck and doing it yourself, you should expect to spend more than $1,000 on expenses. Renting a truck, packing it and unpacking it yourself, and moving to another home in the same town might run you only a few hundred dollars, but are you really going to just pick up everything from one home and put it in the same place in your new home? You’re very likely going to buy new furniture, new linens, new kitchenware, etc. to go with your new home. If it’s a bigger home, you might just need more stuff to fill it out and make it feel cozier.

Hiring movers is an even bigger expense that ranges based on how far you’re moving. Home Advisor estimates the cost of full-service movers at $2,300 to pack up and move the contents of a three-bedroom house locally.

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Closing costs

This is where things start to get a little complic

This is where things start to get a little complicated. This is because the cash outlay to make the purchase becomes (often) much higher than the down payment alone.

Closing costs may run up to 2%-3% of your loan amount

On a $200,000 mortgage, you’ll need to come up with between $4,000 and $6,000 in addition to your down payment.

Closing costs vary from one state to another. This is due to differences in either the real estate transfer tax, or mortgage “stamps” (government taxes collected based on a percentage of your mortgage loan amount). They can also vary based on different rates charged for appraisals, attorneys, and even title insurance.

Closing costs can also vary from one lender to another, and even from one loan to another. For example, each lender charges a different application fee. In addition, lenders often charge “points” – so named because they represent a percentage point of the loan amount.

An origination fee is one kind of point. The charge will generally be between 0.5% and 1% of the new mortgage amount. It represents compensation to the lender for placing the loan. Discount points are another type. They represent points paid to lower the mortgage interest rate on a permanent basis.

For example, by paying a discount fee of 1% of the loan amount you have, you can reduce your mortgage interest rate by approximately 1/8 of 1% (0.125%). However, if cash to close is an issue, paying discount points to lower the interest rate isn’t generally recommended. The small decrease in the monthly payment doesn’t usually justify the cost of the discount points paid upfront.

Low Down Payment Loan Programs

The old standard used to be that homebuyers needed 20% down to buy a home. Times have changed. Many homebuyers, especially first-time buyers, simply don’t have a 20% down payment saved. This is becoming increasingly the case as home prices soar in many U.S. housing markets. For example, the median existing-home price in October 2021 was $353,900, a 13.1% increase from $313,000 in October 2020, according to the latest data from the National Association of Realtors.

In fact, homebuyers who financed their home put down an average of 12% of the purchase price, according to NAR’s 2021 Home Buyers and Sellers Generational Trends Report. First-time buyers using financing typically put down just 7% of the purchase price, the survey found.

For those who can’t afford a 20% down payment, several types of mortgages offer a low down payment option.

The Bottom Line

If you want to save for a house, you should have a solid plan in place. But first, make sure you know how much you need for the down payment. Though many people believe they need a 20% down payment to buy a home, it’s actually possible to buy a house with as little as 3% down.

VA Loans, for instance, allow you to buy a home with $0 down. Research your loan options and make an estimate of how much money you’ll need before you start saving.

Whether you’ve already started saving for a house or you’re starting to save for the first time, there are plenty of ways you can save money for a down payment. Start by creating a budget for your household that includes saving a certain amount of money every month for your down payment.

You may also want to consider picking up a second job, moving into a more lucrative career or downsizing to save more. Reducing your debt, asking for help from friends and family members or renting out an extra bedroom can all also help you put away more money.

If you’ve been saving and are ready to take the next step, get approved with Rocket Mortgage to get the home buying process started.

Earnest Money

Earnest money is a cash payment home buyers make after the seller agrees to their offer. Earnest money deposits signal that the buyer is serious about the purchase and intends to follow through.

Earnest money payments aren’t made to the seller directly. Earnest money is paid into escrow, where it’s held until closing. At closing, the escrow service releases the money to be applied toward down payment, closing costs, or back to the buyer so they can reclaim their cash.

In some scenarios, your earnest money may be forfeited to the seller.

If, as the buyer, you don’t fulfill your obligations to get a mortgage approved; or, if you change your mind about the purchase, the seller may elect to keep your earnest money. This is why earnest money is sometimes known as a Good Faith Deposit.

A typical earnest money deposit will range between

A typical earnest money deposit will range between a few hundred and a few thousand dollars, depending on the sale price of the home. Homes at higher price points typically require larger earnest money checks.

Learn more about escrow.

3. Open a high-interest savings account

It’s smart to have your money working for you while saving for a house. Consider saving your money in a high-interest savings account. While investing your money in the stock market is another option, it is typically a riskier, longer-term approach with no guarantee you will make money in the long or short-term. Instead, opening a high-interest savings account can help you earn some interest on your money without the risk of market volatility in the stock market depleting  your savings.

How Much House Can You Afford?

When you are pre-approved for a mortgage, a lender will tell you the maximum loan amount for which you qualify, based on responses in your application. Your mortgage application asks about your estimated down payment amount, income, employment, debts, and assets. A lender also pulls your credit report and credit score. All of these factors influence a lender’s decision about whether to lend you money for a home purchase, how much money, and under what terms and conditions.

As a general guideline, many prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. For example, if you earn $100,000 per year, you can afford a house between $200,000 and $250,000.

Rather than simply borrowing the maximum loan amount a lender approves, you’re better served by evaluating your estimated monthly mortgage payment. Say you get approved for a $300,000 loan. If your monthly mortgage payment and other monthly debts exceed 43% of your gross monthly income you might have trouble repaying your loan if times get tight. In other words, be cautious about buying more house than you can reasonably afford.

If you’ve been renting for some time—or you already own a home and are looking to buy again—you likely have a strong handle on the monthly mortgage payment you can afford. Renters should keep in mind that owning a home or condo includes additional expenses such as property taxes, maintenance, insurance, possible Home Owners Association (HOA) dues, and unexpected repairs.

Beyond buying a house, you may also want to contribute to other financial goals such as saving for retirement, starting a family, shoring up an emergency savings fund, and paying down debt. Taking on a too-high monthly mortgage payment will eat up cash that could otherwise go toward some of these important goals.

Utility adjustments

Utility adjustments can include a large number of charges. Luckily, they seldom come to more than a few hundred dollars. They basically represent utility costs paid by the property seller in advance.

For example, if a seller fills the heating oil tank just before the closing, you’ll be required to reimburse the seller for the unused oil. This will happen at the closing table. Similar charges can be incurred if the seller has prepaid other utilities, such as water, sewer, or trash removal.

Still another expense that could require adjustment at closing are homeowners association fees. In many homeowners association neighborhoods, member fees are paid on an annual basis. If the seller has paid the fee for the full year, and you’re closing on the house on March 31 – three months into the year – you will be required to reimburse the seller for nine months’ worth of fees. There may also be a fee to the HOA to get started. They may call it a transfer fee or something similar. Basically, it’s a lump sum upfront from the new homeowner to get into the HOA.

Maintenance Costs

Part of owning a home is caring for it and preparing for regular home maintenance. It’s a good idea to budget 1.5 percent of the home’s value for annual maintenance costs.

A home inspection gives you initial insights into needed home and appliance repairs. Learn how often features like your roof, siding, and toilets need replacing and budget for these costs.

2. Inspection and Appraisal

A home inspection, which is typically paid by the buyer, is necessary because it gives the buyer an expert opinion of what repairs might need to be made. The cost for a home inspection usually ranges between $300 and $500. The results of the inspection will often start another round of negotiation between you and the seller as far as which repairs need to be made before the home closing, and who will cover the costs.

Buyers who apply for a mortgage also pay for the appraisal, which costs several hundred dollars. The appraisal is different from the inspection because the appraiser is providing a home value analysis on behalf of the lender to make sure the home’s market value is at least equal to the negotiated purchase price. It is a key part of the underwriting process for a mortgage lender to determine the overall cost of the loan to you.

Some appraisals include inspections, like for FHA loans, but the FHA also encourages buyers to get a separate home inspection.

5. Find ways to save a little more each month

The fastest way to save for a house is to increase the amount you put into savings each month. Here are some tips to save for a house more quickly. 

Reduce your monthly expenses

Reducing your monthly expenses is helpful because you can direct those savings toward your future housing costs. To start, look at your bank and credit card statements to identify money coming in and going out. Scrutinize your expenses to see where you may be able to cut or minimize non-essential spending. For instance, you can cancel subscriptions you don’t use, buy generic products instead of name brand items, or pack a lunch instead of eating out. 

Other ways to reduce expenses is to look at your essential spending to see how you can lower those bills. For instance, you can shop around or bundle policies for better auto insurance prices, negotiate a lower internet bill, refinance personal loans at a lower rate, or, if you own multiple vehicles, transition into using only one-car if possible.

Pay down your debt

The debt you owe can impact your ability to save because a portion of your income is designated to those debts each month. Pay off any credit cards with high interest because the longer you maintain that balance, the more it ends up costing you in interest. If you have any low balance debts you may choose to pay those off completely to avoid continued interest payments. Don’t get too hung up on the larger debts for now. 

Stay consistent. Each time you pay off a debt, act like you still have the payment and send the cash to your house savings account. Paying down your debts may help you improve your chances of qualifying for a mortgage when you’re ready to buy because it lowers your debt-to-income ratio (DTI) and can improve your credit score. 

Earn additional income

While receiving a tax refund, cash gift or a bonus at work will definitely help, earning additional income will help you save for a house much faster. Side hustles are a savings strategy, but be sure to maintain your primary source of income. Your lender will consider all your income sources when qualifying you for a home loan.

Here are some ideas to pursue:

  • Rent out a spare room or parking space
  • Take up a part-time or weekend job (e.g., being a driver for Uber/Lift)
  • Ask for a raise at work
  • Sell a big item like a car/furniture

Dont forget to account for all the little costs of homeownership

There are also upfront costs of settling into your new home that can impact how much money you decide to save up when buying property.

"There are highly variable costs that take a bigger chunk out of your budget than you may anticipate," Pant explained. "You have moving costs like getting truck, hiring movers and buying boxes and tape for moving your stuff. And there are lots of little things you'll want almost immediately for the home like curtain rods, a shoe rack, a bath mat and more. These costs add up quickly."

Pant asserts that not accounting for these costs is actually a huge mistake that many first-time home buyers make. So you might also want to consider saving up separately for these expenses.

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