How To Save for a House in 8 Steps

When deciding how to save for a house, don’t forget you’ll need stockpile cash for more than just your down payment. You’ll need to save extra for closing costs, cash reserves and emergency funds to protect your investment. Coming up with all that cash may sound daunting, but an understanding of all of the costs involved can help you develop a plan that will put you on track to homeownership.

1. Determine how much you can afford

Your monthly mortgage payment is the driving force behind how much you’ll need to save for a house. You can use a home affordability calculator to get a rough idea of how much your payment will be:

You’ll notice a few things when you start crunching numbers:

• Your purchase price range increases when you make a bigger down payment. A large down payment means you take out a smaller loan amount. A smaller mortgage balance leads to a lower mortgage payment, allowing you to afford a higher-priced home.
• Your price range decreases when you choose a shorter loan term. You might love the idea of paying off your loan in 15 years, but the higher payment reduces your buying power. A 30-year mortgage term doubles your payoff period, which lowers your monthly payment and allows you to afford a higher-priced home.
• Your total debt directly affects how much you need to save for a home. Lenders qualify you based on your debt-to-income (DTI) ratio, which measures how much pretax income you’ll use toward your total monthly debt (including your new house payment). Lenders prefer a maximum 43% DTI ratio, but may approve you with a 50% DTI or higher if you have high credit scores and extra cash reserves. If your DTI ratio is too high, you have three choices:

1. Save for a larger down payment to reduce your loan amount and monthly payment
2. Use a portion of your savings to pay off debt and qualify for a higher monthly payment
3. Scale back your home price range to match your current debt load

Calculate how much free cash you have each month after expenses

Lenders don’t consider your phone plan, car insurance premium, grocery bill or child care expenses when they qualify you for a loan. And don’t forget: A DTI ratio is based on your pay before all those taxes, health insurance premiums and retirement deductions are taken out. Your new house payment shouldn’t leave you without a cash cushion for your other recurring expenses.

2. Estimate how much you should save for a house

Once you know how much house you can afford, you can start pinching pennies and stockpiling cash for your house fund. But make sure you understand exactly how much (and for what) you’ll need to save.

The worksheet below can help you figure out how much you need to save for a house:

Calculate your down payment

A down payment is money you spend upfront to buy a home. It’s best to put as much down as possible without depleting all your savings. And contrary to popular mortgage myths, you don’t need a 20% down payment for your home purchase.

For example, most buyers prefer conventional loans, which only require a 3% down payment. Just know that without putting 20% down, you’ll also have to pay private mortgage insurance (PMI), which protects lenders if you default on your loan. You may also be able to apply for a no-down-payment loan through the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).

The trade off between a higher down payment and a low down payment comes down to your current savings situation and affordability. If you can make a large down payment you’ll have a lower monthly payment and can buy a more expensive home. A small down payment leaves cash in the bank, but you may need to scale down your price range to fit the higher monthly payment into your budget.

Plan for closing costs

You typically spend 2% to 6% of your loan amount to pay all the parties involved in your home purchase. Most closing costs are paid when you close on the loan, but some fees such as your home inspection and appraisal may be paid upfront.

Don’t forget moving costs

Unless you have a group of friends or relatives that can help, you’ll probably shell out around $1,250 for a local move. The cost may be double or triple if you’re moving across the country — with the average rising to $4,890 for a distance of 1,000 miles.

Set aside money for home maintenance

Budget at least 1% of your home’s value for ongoing maintenance and unexpected repairs. If you’ve been renting, you’re probably used to your landlord making repairs. But once you’re a homeowner, you’re on the hook to cover those costs. The extra cash will save you big on the interest charges you’d rack up if you paid for the repairs with a credit card or loan.

Add to your emergency fund

Financial planners often suggest you have at least three to six months’ worth of your paycheck in the bank in case something urgent like a job loss or health issue arises. Consider adding an extra two to six months’ worth of mortgage payments to the account so you know you’ll be able to afford your mortgage payments if faced with an emergency.

If lenders think you’re a high-risk borrower, have reserve funds ready

If your DTI ratio is high and your down payment and credit scores are low, your lender may require two to six months’ worth of mortgage reserves. This is rainy-day money that has to be in your account before your closing but isn’t checked again after your loan closes.

3. Set a budget for your down payment savings

Once you’ve picked your loan program and understand exactly how much cash on hand you need to purchase a home, take a detailed look at your budget to find monthly savings opportunities. Consider eating at home instead of dining out for a while, cancel the monthly subscriptions you rarely use or put a hold on education fund contributions.

If you have a lot of credit card debt, consider a debt consolidation loan or personal loan to reduce your monthly payments and funnel the savings into your down payment stash. An auto or student loan refinance could also reduce your monthly debt load and add extra cash to your house savings account.

  Learn more about how to budget to pay off debt.

4. Start a side hustle and add the income to your house fund

You could easily pocket an extra $100 per week with side hustles ranging from delivery or a ride-sharing service, to pet sitting or tutoring neighborhood kids. The savings add up to more than $5,000 per year toward your house saving goals.

  Read more about 12 ways to make extra cash.

5. Add gift money and bonuses to your homebuying account

If you get a big check every birthday or holiday from a beloved relative or receive an annual bonus at work, put some or all of it toward your house savings budget. All standard loan programs also allow someone to give you a cash gift specifically meant to help cover your down payment or closing costs — just make sure you document the transaction with a gift letter.

6. Sell assets you don’t need

You could make a few extra hundred dollars selling things you don’t use anymore at a yard sale or online. If you sell a car, keep the bill of sale and transfer of ownership papers. The lender will need them to verify the transaction.

Be aware of how often you’re depositing large proceeds from your recent sales

Lenders request your most recent two months’ worth of bank statements to determine the average balance for the past 60 days. This is called “seasoning,” and shows the lender you have a history of saving money. However, they’ll also flag large deposits to confirm the money is coming from acceptable sources, potentially delaying the mortgage approval process.

7. Ask the seller or lender to cover closing costs

You can ask the seller to pay between 3% and 9% of your sales price toward closing costs, depending on your mortgage program and down payment percentage. A seller may even offer to pay costs up front to attract more buyers, or agree to pay costs instead of repairing issues that come up with the home inspection. Your lender may also offer a no-closing-cost mortgage option. The lender will pay the costs on your behalf and, in exchange, charge you a higher interest rate.

8. Apply for down payment assistance

If you don’t have the resources to save for a down payment, ask your loan officer about down payment assistance (DPA) programs in your area. Local government and nonprofit housing agencies may pay some or all of your down payment, and can even cover your closing costs in some cases.

These programs are mostly for low- to moderate-income homebuyers. Read the fine print to find out whether you’re required to stay in the home for a set number of years — you may have to repay some of the DPA money if you sell your home too soon.