How Much Money Should I Save Before Buying a House?
November 2, 2021
Buying a house is a huge milestone in life. Excitement can quickly turn to stress when you start to think about how much it will cost though. Knowing all the different expenses involved in buying a house will help you be fully prepared with what to expect. Let’s look at the expenses to save for, and different options for you to consider when saving for a house.
Consider Your Type of Financing
Unless you’re paying cash for your new home, shopping for lenders is just as important as shopping for your house. Different lenders and mortgage programs will require different amounts for down payments. If this is your first time buying a home, an FHA loan could require you to only put 3.5% down. A traditional (also called conventional) mortgage typically requires 20% down. Some lenders offer options at 5%, 10%, and 15% down. There are even some programs that don’t require a down payment at all, like VA or USDA loans, but their requirements are stricter.
Another thing to consider is PMI (private mortgage insurance.) This insurance protects the lender in the case you default on your loan. With many conventional mortgages, you have to put at least 20% down to avoid paying this monthly insurance premium. Some lenders have loan options that don’t require the full 20% down payment, but you may have to pay a higher interest rate.
Take some time to visit with different lenders about what financing options are best for you. Start with the bank you already do business at, but don’t be afraid to compare your options. Buying a home is a large investment, so it’s very important to get the best deal for your situation.
Costs Associated With Buying a Home
There are two big expenses you can expect on closing day: your down payment and closing costs. Closing costs usually come out to 2% to 5% of the home’s sales price. Some of the expenses involved in these costs include the inspection and appraisal fees, prepaid insurance and taxes, and fees to process paperwork.
Keep in mind, you may be able to negotiate with the seller to pay some or all of the closing costs. Every situation is different, and this would be easier in a buyer’s market where competition among other buyers isn’t as fierce.
Another cost associated with buying a house that you might run into is cash reserves. While not a direct expense out of your pocket, your lender may require you to show a set dollar amount saved in your bank account. This amount would cover a few months of mortgage payments to avoid defaulting on your new loan, generally equal to two to three months of payments.
How Big of an Emergency Fund Should You Save
It can be tempting when you’re saving for a house to put every last dollar saved into buying the home, especially when it means you can purchase your new home faster. But it’s important to have a solid emergency fund in place when you become a homeowner.
When you rent a home, your landlord is responsible for repairs and maintenance. But when you become the homeowner, all those costs fall on your shoulders. We like to think the worst will never happen, but you need to be prepared in case it does.
It’s also important to have money saved up in the event you’re unable to work and therefore lose your stream of income. How big of an emergency fund you’re comfortable with will vary for every person, but a good rule of thumb is to have three to six months of expenses saved up in case of emergencies.
At the least, have enough money saved up to cover your homeowner’s insurance deductible. If something major happens to your home that you need insurance to cover, you don’t want to stress about how to meet your deductible.
It’s important as well to consider your big picture financial goals when determining how much money to save before buying a house. How flexible are you on location, size of the home, etc.? All these factors play a big part in how much you’ll end up spending on your new home. One mistake new homeowners can make is not thinking of their long term goals, or where they see themselves in the future. For five more mistakes new homeowners make, click here.
If You’re Paying for Your Home in Cash
Even if you’re not going through a lender to purchase your new home, you’ll still have closing costs and other expenses to pay (like deposits for utilities, etc.) In this case you’ll of course need the money for the sales price, and all closing costs. Good communication with your lender, Realtor, and title company will help you be prepared for closing day.
Also, without a mortgage, you won’t pay your insurance and property taxes through escrow, so you’ll need money set aside for when those bills come due (usually annually.) A good idea is to open a separate account at your bank and deposit some money each month for these expenses.
Another expense that can surprise some people is moving expenses. Paying a company to help move your belongings can be very pricey, especially if you have a long distance to relocate. Renting a moving truck can lead to sticker shock as well. Smaller expenses like moving boxes, packing tape, packing peanuts, etc. all add up too. Research your options for moving services and plan accordingly.
If you do go the DIY route, set aside enough cash to pay for packing materials and a few tanks of gas — and some cash to treat your friends to pizza for their help.
Expenses for Time off Work
Shopping for a new home, packing up your current home, going to appointments, travelling – it all takes time. It’s likely you’ll need to take some time off work to handle the purchase of your new home. Do you have paid time off to cover the time you’ll miss working? If not, factor in some savings to make up for the lost income.
If you’re moving to your new home and don’t have an exact job lined up yet, or it will take some time for your first paycheck to hit, you’ll need to set aside extra funds for living expenses. Having this covered will make the transition to your new home much smoother and less stressful.
Buying a house is one of the largest financial transactions you’ll make in life. It’s important to be prepared with enough savings to cover all the different expenses that may come up. From your down payment to closing costs, and all the little expenses in between, buying a house requires a good amount of savings. With smart planning and good financial habits, you’ll be on your way to purchasing your home in no time!