Buying a house is a major life milestone and a cornerstone of the American dream for many. It represents stability, community, and a place to call your own. But standing between that dream and reality is often one big, intimidating question: How much money do you really need to buy a house? The number can feel so large that it’s hard to know where to begin, making the entire process feel overwhelming before it starts.
The good news is that with a clear plan, the goal is more achievable than you might think. At Remitly, we believe in breaking down complex financial goals into simple, manageable steps. This guide will serve as your roadmap. We’ll walk you through all the house-buying costs, both upfront and ongoing, to help you figure out how much you can realistically afford, and share practical tips for saving for a house so you can turn your homeownership dream into a reality.
What are the main costs of buying a house?
When you start saving for a house, it’s easy to focus on the purchase price, but the total amount of cash you’ll need on closing day is much more than that. Understanding these upfront costs is the first step to creating an accurate savings goal.
The down payment: Your initial investment
The down payment is the portion of the purchase price that you pay upfront. It is almost always the single largest out-of-pocket expense. Your lender provides the rest of the money in the form of a mortgage loan. A larger down payment means you borrow less money, which results in smaller monthly mortgage repayments.
The 20% myth: You may have heard that you need a 20% down payment. While putting down 20% allows you to avoid paying Private Mortgage Insurance (PMI), an extra fee that protects the lender if you are unable to keep up with payments, it is not a universal requirement.
Lower down payment options: Many conventional loans allow for down payments as low as 3-5%. Also, government-backed programs, like FHA loans, can require as little as 3.5%. We’ll cover these in more detail below.
Closing costs: The fees to finalize the deal
Closing costs are the fees you pay to finalize the transaction and your mortgage. These fees don’t go toward the equity of your home. Instead, they go to the various parties who have helped facilitate the sale, such as your lender, the title company, and appraisers.
How much to budget
A good rule of thumb is to budget 2% to 5% of the home’s purchase price for closing costs. So, for a $300,000 home, you can expect to pay between $6,000 to $15,000 in closing costs.
Other common closing costs include:
- Appraisal fee: Pays for a professional appraisal to confirm the home’s value.
- Loan origination fee: A fee charged by the lender for processing the loan application.
- Title insurance: Protects you and the lender from any future claims on the property’s title.
- Inspection fees: For home inspections, pest inspections, etc.
- Attorney fees: If you hire a real estate attorney.
- Prepaid expenses: You may need to prepay a certain amount of property taxes and homeowners insurance.
Moving expenses
Don’t forget that once you buy the house, you have to actually move into it. These costs can add up quickly. You’ll need to budget for things like hiring professional movers or renting a truck, purchasing packing supplies like boxes, tape, and bubble wrap, and utility setup fees at your new home.
Understanding the ongoing costs of homeownership
The costs of owning a home don’t stop on closing day. Your monthly housing payment will be more than just the mortgage principal and interest. It’s important to factor these ongoing expenses into your budget to understand what you can truly afford.
Property taxes
As a homeowner, you’ll need to pay property taxes to your local government. These taxes fund public services like schools, roads, and fire departments. The amount varies greatly depending on your state and municipality. Lenders will generally roll your estimated property taxes into your monthly mortgage payment and hold the money in an escrow account, paying the tax bill on your behalf when it’s due.
Homeowners insurance
Lenders require you to have homeowners insurance to protect their investment (and yours) against damage from events like fires, storms, or theft. Like property taxes, the annual premium is usually divided by 12 and included in your monthly mortgage payment.
Homeowners Association (HOA) fees
If you buy a condominium, a townhome, or a house in certain planned communities, you will likely have to pay monthly or annual HOA fees. These fees cover the maintenance of common areas like pools, landscaping, and elevators, as well as services like trash removal. HOA fees can range from under $100 to over $1,000 per month, depending on the community and its amenities.
Maintenance and repairs
When you own a home, you are your own landlord. If the water heater breaks or the roof starts to leak, you are responsible for the repair costs. Financial experts recommend setting aside 1% to 3% of your home’s value each year for ongoing maintenance and unexpected repairs.
How to estimate what you can afford
Now that you understand all the costs involved, you can begin to figure out a realistic price range for your home search. This involves looking at your income, your debts, and your credit history.
The 28/36 rule: A guideline for your budget
A helpful guideline that many lenders use is the 28/36 rule. It states:
- You should spend no more than 28% of your gross monthly income on total housing costs (including mortgage principal, interest, taxes, and insurance—often called PITI).
- You should spend no more than 36% of your gross monthly income on your total debt, including your housing payment, car loans, student loans, and credit card payments.
Example: If your gross monthly income is $6,000, the 28% rule suggests your total monthly housing payment should not exceed $1,680 ($6,000 x 0.28).
The role of your credit score
Your credit score is a three-digit number that represents your creditworthiness. Lenders use it to determine if you qualify for a loan and what interest rate they’ll offer you. A higher credit score signals that you are a low-risk borrower and will help you qualify for a lower interest rate, which can save you tens of thousands of dollars over the life of your loan. Before applying for a mortgage, check your credit report for any errors and take steps to improve your score.
Understanding your mortgage options
There are many different types of mortgage, each with its own pros and cons.
- Fixed-rate mortgage: The interest rate stays the same for the entire life of the loan, providing a predictable monthly payment.
- Adjustable-rate mortgage (ARM): The interest rate is fixed for an initial period (e.g., 5 years) and then adjusts periodically based on market rates.
- FHA loans: Backed by the Federal Housing Administration, these loans are popular with first-time homebuyers because they allow for lower credit scores and a down payment as low as 3.5%.
A practical guide to saving for a house
Once you have an idea of your budget, it’s time to get serious about saving. This requires a clear goal and a disciplined strategy.
Step 1: Set a clear and realistic savings goal
Calculate a target savings number that includes your desired down payment, an estimate for closing costs (e.g., 3-5% of the target home price), and a buffer for moving expenses. It’s also wise to have an emergency fund of 3-6 months of living expenses set aside so you don’t drain all of your cash on the home purchase.
Step 2: Automate your savings
The easiest way to save consistently is to make it automatic. Set up a recurring transfer from your checking account to a dedicated high-yield savings account each payday. By treating your savings like a non-negotiable bill, you make sure you’re always making progress toward your goal.
Step 3: Strategically cut expenses
Look for areas in your budget where you can cut back. This might mean reducing subscriptions and streaming services, cooking at home instead of ordering takeout, finding free or low-cost entertainment options and pausing expensive travel plans while you focus on your savings goal.
Step 4: Boost your income
In addition to cutting costs, look for ways to increase your income. This could involve taking on a side hustle, doing freelance work in your field, asking for a raise at your current job, or selling unused items from around your home. Every extra dollar you earn can be put directly toward your house fund.
Assistance programs for first-time homebuyers
Many aspiring homeowners don’t realize there are programs designed specifically to help them. These can significantly reduce the amount of cash you need to save.
- Federal programs: FHA loans are a major federal program, but there are others like VA loans (for veterans) and USDA loans (for rural homes).
- State and local down payment assistance: Nearly every state, and many cities and counties, offer Down Payment Assistance (DPA) programs. These can come in the form of grants (which don’t need to be repaid) or low-interest second loans to help you cover your down payment and closing costs. Search online for “[Your State] first-time homebuyer programs” to see what’s available.
So, how much money do you really need to buy a house?
The answer is that it’s more than just the down payment. It’s a combination of your down payment, closing costs, moving expenses, and a healthy cash reserve for the ongoing costs of homeownership.
While the total number can feel large, the process of saving for a home doesn’t have to be overwhelming. By breaking it down into manageable steps, understanding the costs, creating a realistic budget, and saving consistently, you can put yourself on a clear path to achieving your goal. Start by creating your savings plan today, and explore the resources and assistance programs available to you. Your dream of homeownership is within reach.
FAQ
How much money do I need as a down payment for a house?
While 20% is the ideal to avoid PMI, it is not required. Many conventional loans are available with 3-5% down, and government-backed FHA loans require as little as 3.5% down. The right amount depends on your financial situation and the type of loan you qualify for.
What are closing costs, and how much should I budget for them?
Closing costs are fees for services related to finalizing your mortgage and the real estate transaction. They include things like appraisal fees, loan origination fees, and title insurance. You should budget between 2% and 5% of the home’s purchase price to cover these costs.
How can I improve my credit score to get a better mortgage rate?
To improve your credit score, focus on two key things: always pay your bills on time, and keep your credit card balances low (ideally below 30% of your credit limit). You should also check your credit report for any errors and dispute them.
Are there any programs to help first-time homebuyers?
Yes, many! In addition to federal programs like FHA loans, there are some other state and local down payment and closing cost assistance programs across the country. These can provide grants or low-interest loans to help make homeownership more accessible.