So, you’re thinking about buying a house. Yes, buying a home is a great way to get rich, and there’s something special about having your own home that makes it feel more like home.
But I bet you have one big question: How much money do I need to buy a house? It can be hard to figure out how much you need to save, but don’t worry! I’ll walk you through the numbers so you can set a good, realistic savings goal that will help your future home be a blessing, not a burden.
Buying a house is likely one of the biggest purchases you’ll ever make. With home prices continuing to rise across the country it’s understandable to wonder just how much of your hard-earned savings you should dedicate to your down payment. The answer depends on your financial situation and goals. Follow these tips to determine the right down payment amount for you.
Calculate Your Total Homebuying Costs
You need to know how much the whole process will cost before you decide how much to put down. These include:
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Down payment – The upfront amount you pay towards the purchase price to lower your mortgage The minimum is typically 3-5% for conventional loans and 3,5% for FHA
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Closing costs – Fees paid to finalize the sale, like origination charges, appraisal fees, and title insurance. Expect 2-5% of the home price.
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Prepaid costs – Expenses paid upfront like homeowners insurance premiums, interest, and property taxes.
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Moving costs – Expenses to relocate like truck rental, movers, utility connections. Budget at least $1000.
Add these numbers together to get an idea of how much cash you’ll need at closing. Getting pre-approved for a mortgage will help you figure out these costs more accurately.
Factor in Your Financial Situation
How much you should spend on a down payment depends largely on your current finances:
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Savings – The more you have saved, the more you can put down while maintaining an emergency fund.
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Income—The amount of money you make affects how much you can afford each month for your mortgage. No more than 18% of your gross monthly income should be used for housing.
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Debts – The lower your debts, the easier it is to qualify for a mortgage with a lower down payment.
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Credit – A higher credit score allows better mortgage rates and terms, often with lower down payments.
Crunch the numbers to see how these factors enable you to reach at least a 20% down payment while being comfortable with the payments.
Weigh the Down Payment Pros and Cons
Higher down payments have advantages and disadvantages to weigh:
Pros
- Lower mortgage amount and monthly payments
- May allow better mortgage rates
- Avoid private mortgage insurance (PMI)
- Greater equity and wealth building
Cons
- Less savings remaining after down payment
- Potentially higher upfront costs
- Less liquidity in case of emergency
Conversely, lower down payments have their own pros and cons. Evaluate these carefully based on your situation.
Set a Down Payment Goal
As a guideline, strive to put at least 20% down to avoid PMI and get better loan terms. But here are some lower down payment options:
- 3-5% Down – Minimum for conventional loans
- 3.5% Down – Minimum for FHA loans
- 5-10% Down – Averages for first-time home buyers
- 10-20% Down – Provides moderate equity without draining savings
Run the numbers to find the “sweet spot” that fits your financial circumstances. Just be sure to have separate emergency savings.
Talk to Your Lender
Connecting with a lender is vital to determine how factors like your income, debts, credit score and down payment amount will affect your mortgage options. They can provide pre-approval and run scenarios to find the optimal down payment for your situation. This will give you clarity before you start seriously shopping.
Make Sure You’re Ready
Buying a home is a big commitment. Before investing your savings, ensure you’re financially prepared:
- Pay off high interest debts
- Establish an emergency fund
- Know your monthly budget
- Check your credit
- Research mortgage options
If you still have doubts, waiting and saving more may be the smartest move. Patience pays off when making this monumental purchase.
The Bottom Line
How much of your savings to spend on a down payment is a very personal decision based on your financial standing. While 20% down is ideal, lower down payments are possible for many buyers. Crunch the numbers, know your must-haves, talk to a lender, and choose the option that sets you up for long-term homebuying success.
How Much Money Do You Need for Closing Costs?
The term closing costs refers to the fees you pay for services that help officially close the deal on a house. For buyers, closing costs usually include:
- Home inspection
- Appraisal
- Origination fees
- Title insurance
- Homeowners insurance
- Taxes
If you’re wondering how much all that stuff costs, home inspections average $340 and appraisals are typically around $360.1,2 Unfortunately, everything else on the list will be a lot pricier.
When you put all your closing costs together, they’ll probably add up to about 3–4% of the home’s sale price.3 That’s how much you should be ready to pay.
Sidenote: You may also have to pay a commission to your real estate agent. In some cases, sellers might offer to cover part or even all of what it costs buyers to work with their agent to sweeten the deal—but every situation is different, so be sure to talk about this with your agent.
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How To Know How Much House You Can Afford
FAQ
What percent of your savings should you put down on a house?
But you asked about a down payment, which suggests you want a mortgage. Mortgage down payments are typically 20% of the sale price of the house. So, to stay reasonably diversified, you shouldn’t put more than 4% of your savings toward your down payment.
How much of my savings should I put into my house?
As a first-time home buyer, you want to put at least 5% down on a home. So, if you’re buying a home for $400,000 or less, $20,000 would be a big enough down payment. But you’ll also need to save up for closing costs and moving expenses—while making sure the monthly payment doesn’t exceed 25% of your take-home pay.
How much should I spend on a house if I make $100k?
The most common rule for deciding if you can afford a home is the 28 percent one, though many are out there. You should buy a property that won’t take anything more than 28 percent of your gross monthly income. For example, if you earned $100,000 a year, it would be no more than $2,333 a month.
What salary to afford an $800000 house?
To afford an $800,000 house, you typically need an annual income between $200,000 to $260,000, depending on your financial situation, down payment, credit score, and current market conditions.