How Much Money Do You Actually Need to Buy a House?

When people start saving to buy a home, they usually have one number in mind: the down payment. If the house costs $400,000 and you plan to put a certain percentage down, it seems like you should be able to calculate your savings goal and call it good.

The reality is that your down payment is only one part of the money involved in purchasing a home. There may also be closing costs, earnest money, inspections, prepaid expenses, and other transaction costs to plan for. On top of that, I generally do not want to see someone empty every account they have just to make it through closing.

Understanding all of those pieces early can make saving for a home much less confusing.

You May Not Need a 20 Percent Down Payment

Let’s start with the biggest misconception.

Putting 20 percent down is not a universal requirement for buying a home.

There are conventional loan options that allow qualified borrowers to purchase with less than 20 percent down. FHA loans have their own down payment requirements, while eligible VA and USDA borrowers may have options that do not require a traditional down payment.

Putting more money down can still have advantages. It reduces the amount you need to finance and may affect your monthly payment and mortgage insurance. But that does not automatically mean you should pour every available dollar into the down payment.

Imagine you have saved $45,000 and could technically use almost all of it toward buying a home. It may be tempting to maximize the down payment, but then the water heater dies three weeks after closing and your savings account contains approximately enough money for lunch.

Keeping some financial cushion matters.

The right down payment is not necessarily the largest down payment you can possibly make. It is the amount that makes sense when we consider the mortgage, monthly payment, upfront costs, and what you want to have left afterward.

Closing Costs Are Separate From Your Down Payment

This is the part that surprises a lot of first-time buyers.

Closing costs can include expenses associated with the lender and loan, appraisal, title services, recording, prepaid homeowners insurance, property taxes, escrow funding, and other items related to completing the transaction.

Because every purchase is different, I do not like pretending there is one universal closing-cost percentage that will accurately predict every transaction. Once we know more about your financing and the property, we can provide a much more useful estimate.

You may also hear the term “cash to close.” This refers to the final amount you need to bring to complete the transaction after your down payment, closing costs, deposits, credits, and applicable adjustments are taken into account.

Earnest money is a good example. If your purchase contract requires an earnest money deposit, you may pay that shortly after your offer is accepted. Depending on the transaction, those funds can later be credited toward the amount you owe at closing rather than becoming an entirely separate cost.

Do Not Forget About the Expenses That Happen Along the Way

Many buyers choose to have a home inspection performed after going under contract. Depending on the property and circumstances, you may have additional inspection or property-related expenses as well.

Then there is the money you need after you become a homeowner.

I know it is tempting to focus entirely on reaching closing, but your financial life continues the morning after you get the keys. Houses require maintenance, appliances eventually fail, and sometimes the previous owner leaves behind a mysterious repair that apparently held together perfectly until the exact moment the deed changed hands.

Having savings left over gives you room to handle those things without immediately relying on credit cards.

There is no single dollar amount every person needs before buying a home. A buyer using one mortgage program may need considerably less upfront than someone using another, and seller contributions or other parts of the transaction can change the numbers too.

The best way to create a realistic savings goal is to look at your situation before you begin shopping. Tony Daniels works with home buyers throughout Washington, Montana, and South Dakota to help them understand not only what their future mortgage payment might look like, but what they should be prepared for financially before they ever reach the closing table.

Down payment requirements, closing costs, seller contributions, and other expenses vary by loan program and transaction.