How to Save Enough Money to Finally Buy a Home: Down Payment and Beyond

When it comes to buying a home, saving for the down payment gets the most attention. It’s a massive part of the purchase, but it’s not the only expense. That’s why we suggest looking at the big picture: before, during, and after you close.

Our step-by-step guide explains how to save money for a house, along with what costs to expect after you sign the last piece of paperwork.

Table of Contents

1. How to start saving for a house
2. How to save for a down payment
   1. Earnest money
   2. Plan ahead for 1%
   3. Furniture
   4. Necessary home updates
   5. Cosmetic home updates
3. How to save for a house in 2 years
   1. Stage 1: Get your finances ready
   2. Stage 2: Set your savings target
   3. Stage 3: Save strategically
   4. Stage 4: Prepare for costs after you move in
4. Tips for saving for a house
   1. How to get a deposit quickly
   2. What if I can’t save 20%?

How to start saving for a house

A mortgage is the loan you use to buy your home. You might have heard that you need a 20% down payment, but that’s not usually true. Sure, 20% down can help you avoid private mortgage insurance (PMI), but it’s not required.

Start with a plan

So is now a good time to buy a house? The truth is, it depends more on your finances than on the market. The best way to save for a house is by working backward: Once you know the type of mortgage you need, it’s easier to figure out your estimated costs. 

How to save for a down payment

The down payment is the biggest chunk of money you need to save for a home purchase. The exact amount you need depends on your mortgage lender and purchase price. 

Here’s a look at how much you might need for a $400,000 home with different mortgages.

Earnest money

Earnest money is the first big payment you’ll make when you buy a home, typically 1% to 3% of the purchase price. It’s due after the seller accepts your offer.

You don’t need to save it; the money goes toward your down payment and other closing costs. But you need to be prepared to spend it earlier in the process. 

Closing costs

Closing costs are the next largest expense, and they add up fast. Some of the fees are usually due throughout the buying process. 

You can expect to pay an extra 2% to 5% of the purchase price toward closing costs. For a $400,000 home, the costs might range from $8,000 to $20,000.

Let’s take a look at some typical closing costs you might encounter. 

Ongoing costs 

You might not need to save for ongoing costs in advance, but it’s a good idea to plan ahead so your income can support these new expenses. 

Plan ahead for 1%

Most experts suggest saving 1% of your house purchase price per year for ongoing expenses.  For example, your goal might be to save $333 per month for a $400,000 home.

Some homeowners report that their ongoing costs are even higher than 1%, though.

Typical monthly costs of owning a home
byu/curiosityjunkieee inFirstTimeHomeBuyer

A Redditor in the thread above states, “My 500K Townhome Annual Costs are closer to 2% … $2300 Prop Tax $2800 HOA $600 Condo Insurance $3000 Utilities (Trash, Sewer, Water, Electric) $35 Smart Home System $5000 Repairs & Maintenance.”

Here’s a look at some typical expenses so you can begin to prepare. 

Other costs to consider after closing

Some of these expenses can wait a year or two, but you might need to tackle others right away. It really depends on the condition of your home, what you currently own, and the home inspection report. 

Here’s a look at common costs that pop up after closing on your home and moving in.

Furniture

Your previous home and the current amount of furniture you own determines how much you need to spend. If you’re downsizing, you might not need to buy anything. But if this is your first home, you might need multiple big-ticket items. 

Average cost: $4,000 per room

How much should we save to furnish a whole house?
byu/cool_kat_ inFirstTimeHomeBuyer

Necessary home updates

You might have to make immediate home updates for safety or comfort. The home inspection report usually flags these updates, and you can negotiate during the buying process to have the seller pay for some of the repairs. 

Average cost: $2,000

Cosmetic home updates

Some homebuyers want to redo flooring, paint the walls, and make other cosmetic changes before moving in. These projects are often easier to complete when the house is empty. Save ahead of time if you want to tackle some projects before moving day. 

Average cost: $0 – $10,000

How to save for a house in 2 years

Ready to buy a new home in a couple of years? Here’s exactly how to make it happen.

Stage 1: Get your finances ready

Start by requesting a copy of your credit report and score, and make a plan to maintain or increase your score. Your credit score determines how much it costs to borrow money for a home. The higher your score, the cheaper your loan.

Next, take a look at your savings, income, investments, and gifts. Figure out if you already have any money to use for your home purchase. But don’t panic if you’re starting from zero. 

Stage 2: Set your savings target

Meet with a mortgage lender to get an idea of how much house you can afford. (This is not likely to be the maximum amount you’re approved for; it should be a realistic number based on your current income and debt.) Once you have the amount, calculate how much you need to save.

For example, let’s say you meet with a lender and decide that you can afford a $250,000 home with a conventional mortgage. Calculate how much you need for closing costs ($5,000 to $12,500) and a down payment ($12,500). Now you have your savings goal: $17,500.

Stage 3: Save strategically

Once you know the numbers, you can set a monthly savings goal and start working toward it. For example, you need to save $729 per month for the example above.

You can attack the goal from two sides: Cut back on expenses while also picking up extra work or asking for a raise. 

Stage 4: Prepare for costs after you move in

Consider your move-in costs. Whether it’s from a tax refund, promotion, extra paycheck, or birthday gift, try to set aside some extra money for these expenses. 

Tips for saving for a house

Remember: Every dollar counts. Even if you can’t hit the exact savings goal every month, you’re getting closer.

Saving for a large financial goal without external help is a huge undertaking. Try to cut yourself some slack as you save, especially if you’re working on it alone. 

How to get a deposit quickly

Most standard money advice involves some element of luck, and it’s not always possible to save a deposit super fast. These ideas can help you get started, though.

• Ask for a raise, and keep your spending the same.
• Save your entire tax refund.
• Implement a spending ban and only buy necessities. 
• Don’t travel for a couple of years. 
• Postpone expensive events like weddings and parties. 
• Ask family members for help or a temporary loan. 
• Pick up a side gig you can work part-time. 

What if I can’t save 20%?

It’s not always possible to save 20% for a down payment. But you also don’t need to. Most conventional mortgages require a minimum down payment of 5%. Other mortgages, like the VA loan, require even less. 

Down payment assistance

Look for down payment assistance programs. You can start the search at Down Payment Resource. 

Lower down payment mortgages

Consider applying for mortgages that have lower down payment requirements. For example, Fannie Mae offers a mortgage for first-time buyers that requires only 3% down.

Co-buying

It a 3% down payment be easier to afford a home if you co-buy with a friend or family member. It’s not the right option for everyone, but it works for some people. 

Pause other financial goals

You might need to pause other savings goals while you focus on buying a home. Some homebuyers report taking a break from other savings (including retirement!) when preparing for a house purchase:

Would you stop/slow down retirement contributions to have more money for a home purchase?
byu/np1050 inFirstTimeHomeBuyer