Don’t get overwhelmed when you are thinking about how much money to save for buying a house. A house can cost a fortune; it’s true. For some people, it feels impossible to own a house; let alone to save up to buy one. With the always increasing cost of the property, you may feel that your saving will never be enough!
Don’t be discouraged just yet. You should be able to fix up a down payment for your dream house. A lot of people believe that they won’t even be able to afford the down payment, but in reality, they can do it! Before you get too frantic about saving up for a house, be sure to really understand the overall deal and how much you should save to buy one.
How Much to Save before Buying?
It’s true that having some cash can be crucial when you are looking for a house, but then again, how much money to save for buying a house? Most buyers believe that they can’t afford the down payment, which can go to 20% of the property’s value. However, do you know that many of the lenders don’t apply that 20% rules? You’d be surprised to find out that you may actually need less than that.
- The 3% Rules (or Less)
This will depend on your income and credit score. If they are all in flying colors, you should not have any difficulties getting a conventional loan with only 3% of the down payment. You should qualify for VA (Veterans Affairs) or USDA (US Department of Agriculture) loan. In fact, if you have absolutely perfect score and income, you won’t need any down payment at all.
What if you don’t qualify for those loans? No need to worry. Check into your states as they may provide assistance with first-time home buyers. When you begin your saving attempts, find out about the down payment program that may be offered in your state. Check the qualifications and requirements. If you are lucky, you can get the help.
- The Myth about 20%
What’s with the 20% belief and myth, anyway? Well, for a starter, it comes from PMI (Private Mortgage Insurance) rule – which most mortgage investors and lenders have. In the event you have less than the 20% down payment during the closing, it’s likely that you must pay for the private mortgage insurance, which protects the mortgage investors and lenders (if you fail to repay the loan). It is also basically done over your well-being, which helps you to save up money over time. However, this rule isn’t exactly a requirement to purchase a house.
So, where should you begin? If this is your first time buying a house, start your journey by finding out how much money to save for buying a house, and how much you can actually afford. After formulating the numbers, then you can generate a realistic expectation of how much the down payment would be and how much you should set aside for the mortgage.
The Basic Standard Guidelines
Knowing how much money to save for buying a house is handy to help you set up a plan. You can at least create a targeted amount for your home-purchase saving strategy.
- Although the 20% down payment rule isn’t mandatory, it would help a lot if you can save up to that amount. Also targets 5% for the closing costs.
- Also think about smaller expenses which will likely happen when purchasing a house, such as starter home maintenance fund, new furnishings, moving fees, and such things alike. Not only they may exist, but they will likely add up.
- If you are overwhelmed by the thoughts of how much money to save for buying a house, estimate and target a budget for the smaller costs first. Then add that budget for the expected down payment funds. It may help you make everything easier.
The Average Costs
There is no uniformed information about how much money to save for buying a house because one house would implement different costs from another one. There are many contributing factors that determine the cost of a house. However, before you rush in to buy a house, you should know about the common costs related to buying a house – along with the average expenses.
- The Down Payment
This is the biggest cost in the process of purchasing a house. As it was mentioned before, many buyers may target saving up to 20%. However, it’s not the mandatory rule. But if you do want to avoid the PMI, especially if you take the conventional mortgage, then target owning at least 20% of the total value of your dream house.
For instance, the (median) sales price in 2021 Q3 was around $404,700. It means that you need to have at least $80,950 for the 20% down payment. But then again, many mortgages that are sponsored by the government don’t require that high figures for the down payment. You can get FHA loans with 3.5% down payment, especially if you are a first-timer. VA loans may free you from having to own a down payment at all.
But then again, if you want to secure your money on the longer run, or you want to reduce the possibility of having to borrow an abundance of money, targeting for 20% down payment would be ideal. If you can do it, then do it, but if you can’t, there are still other solutions.
- The Closing Costs
This is also another huge spending in the process of buying a house, which leads to the question how much money to save for buying a house. These expenses are prepaid, and they usually include home inspection, title insurance, appraisal, property insurance and taxes, escrow account setup, and also mortgage origination.
The closing costs may vary from 2% to 5% of the value of the house. So, if you want to buy a house worth of $404,700, targeting a 5% would be the best scenario. It means that you need to save around $20,235.
Won’t you be able to include the costs to the mortgage? Sure, you can do that. However, if you can pay them upfront, you won’t have to borrow tons of money. Your lender needs to provide a loan estimate for you to notify you of the closing costs.
- The Moving Expenses
Even when you move the things yourself, you still need to factor in the moving expenses – the amount of money needed to help you with the moving process. The costs would increase if you decide to hire professionals. Don’t forget that even when you do it yourself, you still need tons of spare boxes, a vehicle, the strength, and also the time.
How much it will cost you for the moving expenses? Well, it depends on many things, including how far you move and the service you use. For instance, a full service move (which includes unloading/loading and transport) between San Francisco and New York takes around $3,900 to $7,300. In general, you may need to prepare less than $10,000 for the moving cost.
- The Pre Move-in Repairs and Remodels
How do these activities lead to the planning on how much money to save for buying a house? In most cases, you need to ‘prep’ the house before you actually move in. You may want to install new floor, repaint the wall, or install a new door lock. These repairs, remodels, and work need extra money for the work. Even when you do it yourself, you still need the materials and equipments, right?
In general, you may not know the exact figures, or whether you need to repair or remodel the house, until you pick the house. But don’t forget to include some extra costs if you don’t want to be surprised by the extras.
- New Furniture and Decorating
In general, decorating and furnishing a house may take years of money and time. But when you buy a house, you may want to do some decoration right away. You may also feel the need of buying new furniture immediately. In the event that the new house doesn’t have complete appliances, you may have to buy a dryer, a washer, or a refrigerator – and it means extra expenses. Moreover, furniture and decorating costs also vary, depending on your requirements and personal preferences. If you want to, you can withdraw money from the down payment fund, but it means that you will need to borrow extra. Will you be ready for it?
- The Move out Fees
Whether you are renting or owning a house yourself, you will still deal with the move out fees. If you are renting, it’s possible that you have to deal with the fees, like cleaning fees or lease breakage fees (or also known as early termination fees). If you move out from the old house, you will have to deal with expenses related to selling the house, such as real estate commission.
- Starter Home (Repair) Fund
It would be wise if you can think about starting a (separate) home repair fund. It will help you a lot when dealing with unexpected repairs without going into another debt or ‘jeopardizing’ your budgets. This fund can be handy when you have to repair a damaged refrigerator or replace a furnace.
Most financial experts suggests on saving 1% of the house’s value annually for the home maintenance. It means that if you buy a house worth of $404,700, you need to save around $4,047 a year or around $337.25 a month.
When you want to buy a house, you need to find out about the location and its condition. Does it need repair? Has it been modernized and remodeled? Is it located in a flood plain? Is it a part of HOA (Homeowner’s Association)? You should also ask yourself if it truly fits the budget. Even if it’s your dream house, but it’s way out of your budget, you will only risk it if you are adamant about taking a mortgage. Ask yourself if you can afford both the ongoing costs (including home repairs, mortgage, and utilities) and upfront costs (including down payment and closing costs).
In the end, you need to realize that upfront costs are a lot, and your biggest upfront expenses would likely be the closing costs and the down payment. It’s a good thing that those two can be planned and managed due to the fact that you are able to estimate the overall average expenses from the early stage.
That’s why you need to know the type of house you want to purchase, where the location would be, where you want to live (what country, what city, what region, etc), and what kind of mortgage you will use. Once you figure them up, you are able to calculate a targeted amount that you can save. Unlike the closing cost and down payment, other costs (such as home furnishings, moving expenses, decoration, etc) are more difficult to calculate in advance. It would be wiser if you can consider budgeting to cover these expenses. Knowing how much money to save for buying a house can be helpful to help you budget and plan.