How to Save for a House: A Comprehensive Guide

Buying a home is a significant financial milestone and a key part of the American Dream. As of May 2024, the median home price in the United States was $419,300, according to the National Association of Realtors (NAR). While you don’t need to come up with the entire amount upfront, the down payment and closing costs can add up quickly. In this guide, we’ll explore how to save for a house, where to keep your savings, and how much money you need to set aside.

How Much Money Do You Need to Buy a House?

The amount you’ll need to save for a house depends on various factors, including the location, type of home, square footage, condition, and age. These elements influence the sale price and, consequently, how much you’ll need for a down payment and closing costs. Here are the main expenses you’ll need to save for when buying a home:

Down Payment

The down payment is the portion of the sale price you pay upfront. The rest is financed through a mortgage unless you’re making an all-cash offer. While a 20% down payment has long been the golden rule, it can be a barrier to homeownership. For instance, you’d need to save $80,000 to buy a $400,000 home. A hefty down payment has its advantages, such as a lower monthly payment and no mortgage insurance requirement, but it’s not mandatory for many mortgages.

Here are the minimum down payment requirements based on loan type:

• Federal Housing Administration (FHA) loans: First-time homebuyers with a FICO® Score of 580 or higher can get an FHA loan with a down payment as low as 3.5%.
• U.S. Department of Veterans Affairs (VA) loans: Available to certain U.S. service members, veterans, and surviving spouses with no down payment requirement.
• U.S. Department of Agriculture (USDA) loans: These mortgages are for low- and middle-income homebuyers in certain rural areas, known for their low rates and 0% down payment requirement.
• Conventional loans: Some conventional loans, which aren’t backed by the federal government, require a down payment of just 3%. The exact amount depends on the borrower’s financial situation and the lender.

Closing Costs

Closing costs are assorted fees typically paid upfront when finalizing the home sale. Some closing costs are negotiable and generally range from 3% to 5% of the purchase price. These include:

• Fees paid to the mortgage lender: These are fees associated with the loan itself, such as origination fees, discount points, and mortgage insurance if required.
• Payments to external service providers: This may include the home inspection fee, appraisal fee, title search services, title insurance premiums, and real estate attorney’s fees.
• Prepaid funds: A portion of your homeowners insurance premium and property taxes will likely be due at closing and put into an escrow account. You’ll continue paying into this account with each monthly mortgage payment. When these bills come due, the lender will pay them on your behalf.

Moving Costs

Don’t forget about the logistics of settling into a new home. Hiring movers typically costs anywhere from $878 to $2,547, according to HomeAdvisor. You might also encounter these hidden moving costs:

• Packing materials
• Moving insurance
• Additional fees like heavy item charges and stair fees
• Moving truck rental and gas
• Storage fees
• Furnishing and decorating your new home

Where to Save Money for a House

Coming up with the money to buy a home usually takes time. The following types of accounts can help you earn interest along the way:

High-Yield Savings Accounts

These accounts tend to offer much higher yields than traditional savings accounts. As of June 2024, some annual percentage yields (APYs) are as high as 5.55%. Online banks are known for offering the best rates, but be on the lookout for fees.

Certificates of Deposit (CDs)

You’ll probably be required to keep your money in the CD for a predetermined amount of time. Once this period ends, you’ll get back your initial investment, plus any earned interest. Early withdrawal penalties usually apply, but that may not be a problem if you opt for a short-term CD. As of June 2024, some CD rates are up to 5.35%.

Investment accounts can be a risky holding place if you’re hoping to buy a home within the next few years. Due to regular market volatility, you could end up suffering significant losses in the short term. Retirement accounts also aren’t ideal. They’re designed to hold your nest egg, and pulling money out of tax-deferred retirement accounts will likely result in a tax bill and a 10% early withdrawal penalty.

8 Ways to Save for a House

Here are some practical tips to help you save for a house:

1. Revisit your budget and make sure you’re financially ready to buy a home.
2. Choose a monthly savings target, then set up automatic transfers to your home fund.
3. Set aside work bonuses, tax refunds, and other cash windfalls.
4. Pick up a side hustle or part-time job.
5. Find ways to reduce your expenses, like canceling unused subscriptions and negotiating your bills.
6. Look into first-time homebuyer programs and grants.
7. Negotiate a raise or one-time bonus.
8. Consider taking on a roommate or renting a more affordable home.

Frequently Asked Questions

How Do I Save for a House While Renting?

Saving for a house while renting can be challenging, but it’s possible with careful planning. Start by creating a budget that includes a dedicated savings goal for your down payment. Look for ways to cut expenses and increase your income, such as taking on a side job or reducing discretionary spending.

Is It Better to Save for a House or Pay Off Debt?

Whether to save for a house or pay off debt depends on your financial situation. If you have high-interest debt, it may be wise to pay it off first to avoid accumulating more interest. However, if your debt is manageable and you have a solid plan for paying it off, you can simultaneously save for a house.

How Long Does It Realistically Take to Save for a House?

The time it takes to save for a house varies based on your income, expenses, and savings rate. On average, it can take several years to save for a down payment, especially if you’re aiming for a 20% down payment. Setting a realistic savings goal and timeline can help you stay on track.

The Bottom Line

If you’re curious about how to save for a house, treat it like any other financial goal—do your research, make a plan, and then prioritize it. That might require you to make some trade-offs, but the end result may be well worth it. No matter your timeline, having strong credit can help you qualify for a mortgage with the best rate possible. Check your FICO® Score for free with Experian to get started.

At O1ne Mortgage, we understand that buying a home is a significant financial commitment. Our team of experts is here to help you navigate the mortgage process and find the best loan options for your needs. Call us today at 213-732-3074 for any mortgage service needs. We’re here to make your homeownership dreams a reality.