How Much Money Should I Have Saved Before Buying a House?

Buying a home is a major financial undertaking, involving considerations beyond the purchase price. Understanding financial readiness helps prospective homeowners secure a mortgage, manage ongoing property ownership, and establish a stable foundation.

The Down Payment

The down payment is a sum paid upfront for a home, reducing the mortgage loan required. Its size influences borrowing costs and monthly obligations. While 20% is common, many loan programs allow lower percentages. Conventional loans may require as little as 3% down, especially for first-time homebuyers. Federal Housing Administration (FHA) loans typically require a minimum of 3.5% down for those with a credit score of 580 or higher, or 10% for scores between 500 and 579.

A larger down payment results in a smaller mortgage loan, leading to lower monthly principal and interest payments and reduced total interest paid over the loan’s term. For example, on a $300,000 home, a 20% down payment is $60,000, leaving a $240,000 mortgage. A 3% down payment on the same home is $9,000, requiring a $291,000 mortgage. The median down payment for all homebuyers in the U.S. was 18% in 2024, while first-time homebuyers typically put down a median of 9%.

Making a down payment of less than 20% on a conventional loan necessitates Private Mortgage Insurance (PMI). This insurance protects the lender if the borrower defaults, not the homeowner. PMI costs typically range from 0.46% to 1.5% of the original loan amount annually, added to the monthly mortgage payment. For instance, on a $200,000 loan, PMI could range from $77 to $250 per month.

PMI can be canceled once the loan-to-value (LTV) ratio reaches 80%, meaning the homeowner has accumulated 20% equity. Lenders are required to automatically terminate PMI when the mortgage balance reaches 78% of the original home value. While paying PMI allows homeownership with less upfront capital, a 20% down payment avoids this additional monthly expense and can secure a lower interest rate.

Closing Costs

Closing costs are fees and expenses beyond the down payment that buyers and sellers pay to finalize a real estate transaction. These costs typically range from 2% to 5% of the loan amount, sometimes reaching 6%. For a $300,000 home, this could mean an additional $6,000 to $15,000 in upfront fees.

Common closing costs include loan origination fees, which lenders charge for processing the mortgage application, often 0.5% to 1% of the loan amount. Appraisal fees are paid to a licensed appraiser to determine the home’s market value. Title insurance, protecting both the lender and homeowner from claims against the property’s title, is another expense, with separate policies for each.

Additional costs may include attorney fees, required in some states, for legal services. Recording fees are paid to the local government to officially record the new deed and mortgage. Buyers also often pay for prepaid expenses, such as property taxes and homeowners insurance premiums, collected at closing to establish an escrow account. For example, a lender might require a year of advance insurance and property tax premiums to be held in escrow.

Other potential fees include credit reporting, flood certification, and survey fees to confirm property boundaries. Some closing costs are negotiable, and sellers may contribute, depending on market conditions and loan type. Buyers receive a Loan Estimate within three business days of applying for a mortgage, providing estimated costs, followed by a Closing Disclosure at least three business days before closing with final figures.

Initial Homeownership Expenses

New homeowners should anticipate immediate, one-time expenses shortly after acquiring a property, beyond the down payment and closing costs. These cover practical aspects of moving in and settling down.

Moving expenses are a portion of these costs. Professional movers for a local move typically range from $800 to $2,500, while long-distance moves cost $2,200 to $5,700. These figures vary based on belongings, distance, and services like packing. Renting a moving truck for a do-it-yourself move is less expensive, with local rentals potentially costing as little as $150, and long-distance rentals upwards of $1,000 to $2,000.

New homeowners may also face immediate repairs or renovations. Even a move-in ready home might require fresh paint, minor plumbing fixes, or other small adjustments. The average cost of emergency home repairs for homeowners was about $1,667 in 2023.

Furnishing or appliance purchases are another common expense. Many homes do not come with appliances, requiring buyers to purchase necessities like refrigerators, washers, and dryers. Utility connection fees and deposits are also typically required to activate services like electricity, water, gas, and internet. These fees vary by location and provider, sometimes ranging from a few hundred to over a thousand dollars.

The Emergency Fund

Establishing an emergency fund before purchasing a home is a financial safeguard. This fund serves as a cushion for unforeseen circumstances during homeownership, covering unexpected events that could derail financial stability.

Financial experts recommend saving at least three to six months’ worth of living expenses in an emergency fund. For homeowners, this should account for increased property ownership expenses like mortgage payments, property taxes, and homeowners insurance, in addition to regular household costs. An emergency fund should also consider potential home-related emergencies, which are often costly.

Unexpected events like job loss, major home repairs, or medical emergencies can quickly deplete savings without an emergency fund. For instance, a furnace breakdown, leaky roof, or burst pipe can necessitate immediate and expensive repairs. Some guidelines suggest allocating 1% to 2% of the home’s value annually for maintenance and repairs, which could be drawn from an emergency fund for large-scale issues. For an older home, this percentage might be higher.

Maintaining an accessible emergency fund in a separate, liquid account, such as a high-yield savings account, ensures funds are readily available. This financial buffer provides peace of mind and prevents incurring high-interest debt or depleting long-term investments during challenging times.