How Much Should You Save for a Home?

My family is on a long journey toward homeownership. Despite plenty of questions about when our little family of three will move out of our tiny apartment and into a home, we know we’re just not ready to buy a home yet. The main reason? We know how much money we’ll have to save before we can buy, and we aren’t there, yet.

Are you wondering how much you’ll need to save before you buy your first home (or a new home, if you’re thinking of moving)? Here are the questions you should consider when setting your home savings goal:

How much house can you afford?

How much you’ll need to save for your home depends on how much you plan to spend. One rule of thumb is to spend about 2.5 to 3 times your annual income on a home. So if you bring in $60,000 a year, shoot for a home that’s worth $150,000-$180,000. If you make $100,000 a year, shoot for a home worth $250,000-$300,000.

You get the idea.

But as we outlined before, this rule of thumb is merely a starting point. If you’re carrying a load of debt, will have high homeownership costs in taxes or maintenance, or simply want to live on a lot less than you make, aim smaller.

This calculator from the Connecticut Housing Finance Authority can help you weigh all this financial information and decide how much you can afford.

Remember, how much house you can afford is, at least in part, up to your mortgage lender, who may offer you less money than you think you can pay back. Also, it’s fine to shoot for a much lower goal, especially if you’re buying your first home. There’s something to be said for an affordable-but-comfortable starter home.

How big of a down payment do you need?

Many financial experts recommend that you have a 20 percent down payment. After the recent housing crisis, the need for higher down payments became more evident than ever. The larger your down payment, the less likely you are to owe more on your house than it’s worth, even if housing values plummet.

How much down payment you really need depends on several things, including your credit score and the type of loan you’re looking at. A conventional mortgage loan has recently required a down payment of nearly 20 percent with most lenders. But NBC reported in January that lenders are starting to relax these standards a bit.

Still, if you don’t have stellar credit or a high income, you’ll probably need to save at least 5-15 percent for a conventional loan. And if you pay less than 20 percent down, you’ll have to pay for private mortgage insurance, which can seriously add to the overall cost of homeownership each month.

If it’s going to take you years of shelling out expensive rent checks before you can save that much toward a home, consider an FHA loan. These loans, backed by the Federal Housing Authority, require down payments of as little as 3.5 percent of the contract sales price of the home.

With an FHA loan, you’ll need cash for your down payment and other closing costs, but you can get at least some of it from a gift or even a home buying grant. One caveat: you’ll have to pay private mortgage insurance until you have at least 20 percent equity in your home, which could take decades with a down payment that small.

Here’s the bottom line: how much you need to save for a down payment varies tremendously depending on a number of factors. But the more you can save, the better (and more affordable) homeownership will be for you. The key is to set a goal based on the type of loan you want and how much you’re planning to pay for your home.

How much will you pay in fees and closing costs?

Unless you can strike a deal where the seller pays part or all of your closing costs, you’ll need to save up the cash for these costs yourself. The general rule here is to allow an extra 3-4 percent of the home’s purchase price for your closing costs.

What are closing costs? They include fees from your lender, processing, and other fees. So when you’re calculating how much to save for a home, tack on an extra 4 percent of your home’s purchase price to cover your closing costs.

Again, if you’re struggling to save enough money to buy a home, you may be able to get some help with closing costs. If you buy with an FHA loan, closing costs may be included in your 3.5 percent down payment, and many state homeownership programs offer assistance with closing costs.

What other costs should you consider?

Unfortunately, your down payment and closing costs aren’t the end. You’ll probably need to pay for an inspection of the property, which can cost between $150 and $400. If you need an attorney to protect your interests in the buying process, legal fees could cost $300-$600, and a title search could cost you $125-$200.

Keep in mind that not all of these costs will need to be paid by all homebuyers. The home you buy, the lender’s requirements, and other factors will determine which costs you’ll have to pay. Still, these other costs can really add up, so you’ll want to take them into account when saving for a home.

What’s the bottom line?

The bottom line is that I can’t tell you exactly how much to sock away for a home purchase. You’ll have to run those calculations on your own. The figure you come up with might be a little astonishing, even if you’re saving for a more-affordable FHA loan on a very affordable home.

But it’s worth your while to take time to save for your home. When you have money in savings before you buy, you’ll be more comfortable buying, have more affordable mortgage payments, and have a fabulous homeownership experience.

Looking for ways to save for your down payment? Check out our articles on ways to save here and here.