The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
How Much Savings Do You Need to Buy a House?
If you’re thinking about buying a home and haven’t done this in a while (or ever), you might be wondering how much savings you need to buy a house. This is a great first question to ask and the ideal way to start your home search out on the right footing.
Imagine that you’ve perused every home website, attended countless open houses, stalked your dream neighborhood looking for the elusive “For Sale” sign and finally found the perfect new pad. Maybe you even make an offer and it’s accepted! But when you start the process for a home loan, you find out that you haven’t saved enough cash yet for all of the expenses involved to get your new place. So, before you can say “sold,” another buyer swoops in and swipes your dream home.
When you’re in the market to buy a home, it’s smart to have all of your proverbial ducks in a row before making an offer. That could mean getting a preapproval letter, figuring out your price range and of course the most important step — making sure you have enough money saved. So, how much savings do you really need to buy a home? Let’s look at the various costs involved to figure out the right figure for you.
In order to get a mortgage loan, you’ll typically need to put down some money on the home. In the past, the rule of thumb for a down payment was 20% of the home’s purchase price. For example, if you bought a $300,000 home, you would have needed to save up $60,000 for your down payment. Feeling the pinch in your wallet already? Here’s some great news: While some loans still require a sizeable down payment, today there are loan options that require as little as 3-5% down.
3-5% down programs: With our $300,000 home example, that means you would only need to save $9,000-$15,000 for your down payment instead of $60,000!
Before you decide to call it quits when you’ve saved $15K, remember that there are additional costs to buying a home — plus some major benefits to saving up for a bigger down payment. By putting down 20%, you would not only pay less in interest over the life of the loan, you would also avoid the need for private mortgage insurance (PMI).
With most home loans, homeowners are required to purchase PMI until they have paid off 20% of the home, whether with a down payment or by making their mortgage payments until they have paid off that amount. (Note that VA loans for veterans and service members do not have this requirement but most other mortgages do.) PMI is added to your mortgage payments, so keep that in mind when calculating how much house you can afford.
Only 31% of buyers in the Phoenix area put down 20% on a home, compared to 37% who put down 5% or less.1
Closing is the final step in the homebuying process. This is where ownership of the home will be transferred to the buyer. On your closing date, you’ll sign and finalize your loan documents and other paperwork. You’ll also pay the fees associated with this process, which are called closing costs. These costs include items like taxes, title insurance, attorney fees and home appraisals.
You can expect closing costs to be approximately 1-3% of the home’s purchase price (or $3,000-9,000 in our $300,000 home example) depending on the loan type, your credit score and overall characteristics of the loan. Ask your lender about programs that can help with closing costs, such as Desert Financial Credit Union’s offer for $500 toward closing costs2 when you work with a Participating Real Estate Broker.
Tip: Some mortgage programs allow friends and family to help you with home costs, but you’ll need to document their contributions; for example, with a copy of the check and deposit slip or proof of a wire transfer.
While a home inspection is not required as part of the homebuying process, many buyers want to know exactly what they are getting into when they make such a large purchase. Arranging a home inspection gives the buyer the opportunity to consider any potential issues with the home before the real estate transaction is completed. Home inspections cost $300-500, on average.
Typically, the buyer arranges and pays for an inspection to be done by a home inspector of their choosing. The home inspector completes a report detailing any problems with the home and the buyer receives a copy. The buyer can then take the home as-is or request that the seller complete certain repairs. A prospective buyer may also back out of the sale at this point if they have put a contingency for this in their purchase agreement and they are not satisfied with the results of the home inspection.
Tip: Home inspections don’t cover everything. If you need a pool inspected or want to get detailed pest and mold reports, you may need to hire additional contractors.
A home appraisal is a professional assessment of the value of your home. Before your lender approves your home loan, they will want to know how much the home is worth. If, for example, your $300,000 home is valued at $320,000, a lender might be willing to accept a smaller down payment. If the same home only appraised for $280,000, a larger down payment would typically be required so that the loan amount does not exceed the value of the home. If the value of the home is less than the loan amount requested, the lender may not approve the loan.
Because a home appraisal is required, the lender often schedules this appointment for the buyer. Appraisals in Arizona typically cost between $450 and $800, depending on factors such as the location of the home, size of the house and property, availability of information on similar properties and other considerations. The buyer typically pays this fee, either upfront or as part of the closing costs.
Let’s say you prepped for the $300,000 home scenario and you have $30,900 saved up ($15,000 down payment, $15,000 for closing, $500 inspection and $400 appraisal fee). That might seem like enough but there are additional costs to consider, including:
- Moving expenses
- Repairs and renovations
- Furniture and décor
The average cost of a local move is $1,250. Moving from out-of-state? That number jumps to $4,890.3
The last thing you want after moving into a new home is being “house poor” or living beyond your means. When you’re getting ready to buy a home, consider padding your budget with extra money that you can use to make any changes, pay for movers, purchase new furniture and just relax in your new space.
Home Sweet Home
Saving up to buy a house can seem like a lofty goal. But if you know how much to save (and for what), you’ll be primed and ready when you find the right place. To get you started, consider opening a separate savings account just for this goal. That way, you won’t be tempted to pull out cash from your “house fund” to take a trip or pay for car repairs. Once you have your savings in order and you’re ready to start home-shopping, all you’ll have to do is get a pre-approval letter, pick out a place and start planning all of the fun things you’ll do in your new home!
2Participation in the Real Estate Broker Program is voluntary. Desert Financial Credit Union and its subsidiary Define Mortgage Solutions LLC do not receive any benefit, monetary or otherwise, from the Participating Broker under this program. Participating Brokers are non-affiliated third parties of Define Mortgage Solutions LLC and Define Mortgage Solutions LLC makes no warranties or representations about the services provided by Participating Brokers. To participate in this program, the member does not have to finance mortgage loan through Define Mortgage Solutions LLC. For full program details, see the Real Estate Broker Program Member Notice Acknowledgement.
Mortgage loans are offered by Define Mortgage Solutions, LLC, NMLS ID #1761612, a subsidiary of Desert Financial Credit Union. BK#0949053