So you’re wondering, How much money do I need to buy a house? That’s a smart question to ask, especially since buying a house can come with a lot of hidden expenses that are easy to overlook until closing day.
If you want your home to be a blessing and not a curse, we’ll show you how much money you need in the bank to make your home-buying process as smooth as butter.
Ready? Set. Go!
How Much Cash Do I Really Need to Buy a Home?
If you’re getting a mortgage, a smart way to buy a house is to save up at least 25% of its sale price in cash to cover a down payment, closing costs and moving fees. So, if you buy a home for $250,000, you might pay more than $60,000 to cover all of the different buying expenses.
For a visual, here’s what that home-buying budget can look like:
Home Price: $250,000
Percentage of Home Price
Total Buying Costs
If these numbers sound too steep, you’re not alone. In fact, last year, the average first-time home buyer made a 7% down payment, while repeat buyers brought about 17% to closing.3 So, what’s kept home buyers from saving up a big down payment?
See how much house you can afford with our free mortgage calculator!
Well, student loans continue to top the chart as the number one reason today’s home buyers have trouble saving for a home purchase—followed by credit card debt and car loans.4 That’s why you need to get out of debt ASAP and have a fully funded emergency fund before buying a home.
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How Much Money Do I Need for a Down Payment?
How much should you save for a down payment? As much as possible. But for reference, we recommend saving 10–20% of the total house price. If you save up a 20% down payment, you’ll avoid paying private mortgage insurance (PMI)—a type of insurance that protects your lender (not you) from losing money in case you can’t make your mortgage payments.
For first-time home buyers, a 5–10% down payment is okay, but keep in mind that your mortgage payment will be higher—and you’ll have to pay PMI if you opt for anything less than 20%.
Any down payment amount less than 5% is way too low. Some government-insured programs (like FHA, VA and USDA) make it easier to buy a house with little to nothing down. But going that route will have you paying so much extra in interest and fees, you’ll sink your overall financial plan.
For a simple way to beef up your down payment as fast as possible, download our free Saving for a Down Payment guide.
How Do I Figure Out My Home-Buying Budget?
After you’re out of debt and have an emergency fund, the next thing you need to do is a little bit of math to see how much house you can afford. If you’re getting a mortgage, make sure your monthly payment isn’t more than a fourth of your take-home pay—otherwise you’ll be house poor!
That 25% limit includes principal, interest, property taxes, homeowners insurance and—depending on your situation—PMI and homeowners association (HOA) fees. Use our mortgage calculator to enter your down payment amount and try out different home prices within your budget.
If you want a smart mortgage you can pay off fast, talk to Churchill Mortgage about getting preapproved for a 15-year fixed-rate conventional loan—the cheapest type of mortgage and the only kind we recommend. Any other type of mortgage will drown you in interest and fees and keep you in debt for decades.
To safeguard yourself, here are some rip-off mortgages to avoid:
- FHA Loan: Sure, an FHA (Federal Housing Administration) loan will allow you to buy a house with a down payment as low as 3.5%. But in exchange, you’ll be charged an extra fee for the life of the loan—on top of all the extra interest you’ll pay and the decades you’ll spend in debt for not saving up a big down payment. Bad idea.
- VA Loan: A VA (U.S. Department of Veterans Affairs) loan helps veterans get into a house with no money at all! But VA loans include a hefty funding fee that could be 1.4–3.6% of the loan amount. No thanks.
- USDA Loan: A USDA (U.S. Department of Agriculture) loan is designed to help people in rural areas buy a house with zero money down. But again, that’ll crush your budget over the years with all the added interest payments. Plus, if you can’t afford to put any money down on a house, you’re not in an ideal place to handle maintenance and all the other unexpected costs that come with homeownership.
Okay, now let’s look at some other expenses related to buying a house.
Buyers typically pay around 3–4% of the home’s sale price in closing costs.5 The term closing costs refers to fees for services that help to officially close the deal on a house. For buyers, closing costs usually include a home inspection (paid before closing day), an appraisal and many other loan-related costs, like origination fees, title insurance, homeowners insurance and taxes.
To break this down a little more, a home inspection is when a pro examines your potential home from top to bottom to warn you of any issues or damage before you buy, which costs $280–400.6 Get ready to double that cost (womp, womp) since it’s about the same price for the home appraisal—which is your lender’s way of making sure the home is worth the amount of money they’re loaning you.7
But those costs are small potatoes compared to other closing costs like title fees, taxes and loan origination fees. It’s tough to calculate all these exactly because they vary based on where you’re buying a home, but they could each cost 1% of your home’s sale price.
Don’t forget to save some cash for moving expenses. Unless you’re able to bribe enough friends and family members with pizza to help you move all your stuff for free, you’ll probably need room in the budget to help pay for your move. Since there are many ways to handle moving costs, like renting a moving truck or hiring a moving company, costs range anywhere from $900–2,400 for a local move.8
Can I Buy a House With Cash?
Okay, now you know how much money you need if you’re buying a house with a mortgage. But what if you’re a rock star at saving money and can actually pay for your house with 100% cash?
Check out the sweet benefits of paying for a house outright in cash:
- You’ll be more attractive to sellers who’ll likely choose you over the competition to close faster.
- You’ll enjoy a faster home-buying experience by cutting out the lengthy loan-approval process.
- You’ll avoid decades worth of interest fees (which can add up to hundreds of thousands of dollars).
- You’ll skip extra loan-related fees like PMI.
- And, best of all, you won’t have a mortgage payment!
Some people believe in the myth that it’s dumb to buy a house in cash because they’ll miss out on the mortgage interest tax deduction. But those people aren’t doing the math.
For example, if you buy a home with a mortgage payment of $2,000, and the interest portion is about $1,000 per month, you’ll pay around $12,000 in interest the first year, which creates a tax deduction.
And, sure, you lose that tax deduction if you buy a home with 100% cash. But let’s see what this really means. If you’re in a 22% tax bracket—without that $12,000 mortgage interest deduction, you’ll have to pay $2,640 in taxes on your $12,000 of earnings.
Here’s the kicker: According to the mortgage tax advantage myth, you should send $12,000 in interest to a mortgage lender to avoid sending $2,640 in taxes to the IRS. Would you really want to pay $12,000 in mortgage interest just to save $2,640 in taxes? Of course not!
Besides, with the new higher IRS standard deduction, most homeowners save more money on their taxes by choosing the standard deduction instead of the mortgage interest deduction anyway. For reference, the standard deduction for 2022 is $25,900 if you’re married filing jointly or $12,950 for single filers.9
Here’s the bottom line: If you can buy your home with 100% cash—without touching your emergency fund or sacrificing other financial goals—it’s totally worth doing!
Buy a House With a Top Real Estate Agent
If you’re already in good shape and have saved enough cash, get the ball rolling on your home purchase by working with a RamseyTrusted real estate agent. We make it quick and easy for you to find the best-performing agents through our Endorsed Local Providers (ELP) program. These local agents make it their mission to help you find a home that allows you to keep all your other financial goals in balance.
Frequently Asked Questions
How Do I Budget for a House?
The first step to budgeting for a house is to know how much down payment you need. Ideally, you’ll want to save a down payment of at least 20%. For first-time home buyers, a smaller down payment like 5–10% is okay too—but then you’ll have to pay PMI. Whatever you do, never buy a house with a monthly payment that’s more than 25% of your monthly take-home pay on a 15-year fixed-rate mortgage (which has the overall lowest total cost). And stay away from expensive loans like FHA, VA and USDA.
After you’ve set your savings goal, here are some tips on how to save for a house: Pay off all your debt, tighten your spending, hold off on your retirement savings (temporarily), start a side job, and sell stuff you don’t need.
Let’s say you want to buy a $200,000 house. Your down payment savings goal is $40,000 (or 20% of the home price). To budget for this house in two years, you’d need to set aside $1,700 each month ($40,000 / 2 years / 12 months = $1,700).
Where Should I Stash My Down Payment?
You could stash your down payment in a simple money market savings account. You’re not going to make tons on interest, but you won’t lose money either. Keep in mind: Saving a down payment is not the same as investing for retirement. Saving a down payment should only take you a year or two—so you want to keep your savings in a place that’s easy for you to access.
When Should I Start Saving for a House?
As soon as you think you’re ready to buy a house, start saving for one! For reference: You’re only ready if you’re debt-free and have an emergency fund of 3–6 months of living expenses. It’ll probably take some intense saving over a period of time—we’re talking a year or two just to save for a down payment—so you’ll want to get started right away.
How Can I Save for a House Quickly?
If you want to save for a house fast, you need to be debt-free and have an emergency fund of 3–6 months of expenses saved. With your income freed from debt payments and an emergency fund to protect you from life’s unexpected surprises, you can save for a house much faster. Here are some other ideas to help you save money fast.
I Can’t Afford a House—What Do I Do?
Trying to buy a house when home prices keep going up can be frustrating. But with the right plan, you can do it! One big thing that holds people back from saving for a house is debt. Debt is dumb! So focus on cleaning up all your debt—and never go back. Then save up an emergency fund of 3–6 months of living expenses to protect yourself from life’s unexpected surprises. After that, you’ll be ready to save for a house.
To buy a house you can afford, never buy one with a monthly payment that’s more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional loan (stay away from FHA and VA loans). Ideally, you want to save at least a 20% down payment. For first-time home buyers, a 5–10% down payment is okay too—as long as the extra PMI fee doesn’t jack up your monthly payment beyond the 25% rule.
After you’ve set a down payment goal, it’ll take time to save toward it. Give yourself a year or two of intense saving. Try these smart ways to save for a home down payment.
Once you have a strong down payment saved up, work with an experienced real estate agent who knows your area. The best agents will work hard to find you a house that fits your budget.