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Like anyone else, if you dream of having somewhere you can call home, you’ve probably been asking yourself, “how much money should I save before buying a house?”
Before making that huge purchase, you must have a clear answer to this vital question. Purchasing a home may come with additional costs that are easier to ignore until you realize when closing on the sale. Read through this article to understand how much you need to save to buy your dream home.
How Much Money Should You Save Before Buying a House?
There are numerous ways to buy your dream home, but many prefer paying the whole amount in cash or securing a mortgage.
If you aren’t ready to purchase the house outright and are considering a mortgage, the best move is to save more than 20% of the house’ marked prices as a down payment.
The down payment size varies based on the asking price of the property. So, ensure you save enough cash to cover the closing costs if you’re purchasing a house with a mortgage.
Typically, traditional mortgages require at least a 3% down payment. On the other hand, you’ll need to put down at least a 3.5% down payment to obtain a Federal Housing Administration (FHA) loan.
And if you’re a military veteran, you might be eligible for the Veteran Affairs loan. This mortgage loan type product doesn’t require any down payment.
According to statista.com, the average cost of buying a house in the U.S. was $391,900 in 2020, and in 2021, the price rose to $453,700.
Factors that Affect the Average Cost of Purchasing a House
Many things can affect the average cost of buying a home. So, you must save more than the down payment. Here are some of the factors that might impact the cost of purchasing a home.
Down payment is the amount of money you pay upfront during a real estate transaction. It’s typically a percentage of the home’s purchase price, which can range anywhere from 3% to 20% of the property. The more you put down, the lower your monthly payments will be.
These are fees you need to pay to cover various expenses to finalize a mortgage. This can include legal fees, survey fees, and title search fees.
Since these fees vary by region, you must consult your realtor or creditor about the amount they charge if they can’t roll the transaction expenses into the loan. You can expect to pay anywhere between 2% to 5% of the loan amount.
When relocating, you want to ensure you can afford to move all your items. Hiring a moving company can be expensive. You may also want to rent a storage space during your move. That’s why planning is crucial since moving expenses can increase pretty fast.
Property taxes will range from 0-10%, depending on your state and the property’s value. So, you might be asking, should I consider these expenses when calculating how much money should I save before buying a house? Yes, it’s very important.
The mortgage lender will charge appraisal fees when evaluating a home’s value. A property appraisal is done before purchasing to ascertain the home is worth the lender’s lending amount.
Home Inspection Fees
You will need an independent home inspection before making the final move on the huge purchase. A home inspector will assist you in detecting any issues affecting the home’s value. Besides, they will let you know if any part of the home requires a repair or replacement.
Homeowner Association Fees
If you want to buy a house within a community, be ready to pay homeowner association fees. The money goes towards the maintenance of shared spaces, security, and landscaping.
These charges can increase quickly based on the number of homes, community size, and other aspects. The fees are paid quarterly or monthly and aren’t rolled into the mortgage payment plan.
Private Mortgage Insurance
Private mortgage insurance (PMI) may be compulsory if you have a poor credit score or can’t afford a sizable down payment. So, check out with your creditor to know what alternatives they provide.
However, you’ll only need to pay for the PMI if you can’t afford a 20% down payment. If you borrow over 80%, you’ll pay PMI until you build at least 20% equity and can refinance.
Pre-Move-in Remodels and Repairs
These are maintenance expenses before moving in. On top of the mortgage payment, you must budget for renovation, repairs, utilities, and even lawn care.
Most people don’t notice how costly a house can be until they own it. It’s vital to watch out for these potential expenses and include them in your housing budget.
Decoration and New Furniture
Once you move in, you’ll need to decorate the place and purchase new furniture to make the home livable. Buying new furniture can be expensive. So, if you don’t have the money required, you may have to opt for blow-up furniture.
Starter Home Repair Fund
The starter home repair fund will help you set aside money for unexpected repairs once you move in. Maybe the house has leaky pipes, a leaky roof, or damaged walls. Budgeting for these renovations is essential since they can quickly hurt your emergency fund.
8 Tips to Save for a House on a Low Income
Buying a home is a considerable investment, which can make even be harder for low-income earners to achieve their dream of homeownership.
However, there are several proven ways that can help you save for a house or even on a low income. While that amount might seem small, it will add up pretty fast.
1. Create a Budget
Clever budgeting is the first step to saving money to buy a house. If you can’t figure out where money vanishes every month, it can be challenging to set aside cash for your down payment.
First, ensure you know the amount you pocket every month, including the allowances from your partner or spouse, if they will be contributing to the down payment.
After that, table down your credit card payments and other expenses. Find out where you spend the most money.
Note the amount you spend on necessities such as rent, utilities, and student loan repayment. Then, look at how much goes to luxuries such as entertainment and designer shopping. A budgeting app will assist you in automating the work if you don’t want to calculate the costs yourself.
Once you categorize your costs, look for the things you can do without. Create a definite and realistic budget for the things you can’t do without and stick to it. Ensure you set aside some money for the down payment every month. Treat savings as your non-optional cost.
2. Try Downsizing
Downsizing is the most effective way to save money quickly for your home purchase. This means you cut down your costs and live frugally as you save.
Essentially, you will be practicing minimalism by spending on the items you need. So, you will only buy necessary things and channel the extra cash into the savings account.
Move to a smaller house (if you’re renting) and sell the things you no longer need, like clothes, home appliances, and electronics. Most people practice minimalism when saving for huge purchases. You might realize that you enjoy a simple life.
3. Ditch Bad Money Habits
Ditching bad habits will help you save enough money for your down payment. If you are inclined to impulse shopping, either online or in-person, consider reducing those purchases.
Start by unsubscribing from marketing emails such that you don’t frequently come across enticing deals in your mailbox. This will not only help you save for your dream home, but you’ll also avoid cluttering your house.
While eating out can be fun and exciting, it’ll hurt your wallet. Cook a few meals home to save money. Try quitting these toxic habits and channel that money to your house payment plan.
4. Look Out for Other Employment Options
While it is impossible sometimes, switching different jobs and getting a better-paying job will help you save money for purchasing a house.
Browse through job posting websites and income comparison sites to find out if you get as much income as workers with the same roles.
If you discover your income is below average, use your findings as leverage to request a pay raise or inquire about a job promotion. Side hustles are also a perfect way to boost your income. You can consider online jobs that pay hourly.
5. Skip Vacations
Visiting new places can be exciting. Unfortunately, it’s always a costly affair.
Consider channeling that money to the down payment of your home and enjoy a simple staycation within your state or city. Here are the ideas to help you:
- Visit nearby historical sites: You don’t have to book a flight to Maldives or Seychelles to explore nature and experience culture. The U.S. is one of the places with a rich and exciting history. You can visit museums, nature parks, or historical sites near you for memorable experiences at a portion of the price.
- Have an at-home spa moment: Fantasizing about a spa treat? Replicate that experience on your own with plenty of scented candles, a bubble bath, and an at-home facial kit.
- Try an art class or local cooking: For some travelers, the excitement of trying new things is part of a vacation. If you are one of them, try a new meal at a nearby cooking class or create artwork at your closeby recreational facility for a cheap learning experience.
6. Get a Side Hustle
The current economy has a high demand for gigs. So, there are many side hustles that you can try and make good money. They include:
- Freelance work: With freelancing, you complete some gigs for clients from the comfort of your house. You can contract your skills as a photographer, artist, musician, virtual assistant, or writer.
- Drive for ridesharing companies: Rideshare companies such as Lyft and Uber offer a perfect side hustle since they let you work as little or as much as you want. If you have a 9-5 job, you can increase your income by driving on holidays, weekends, and at night. Besides, there are times when the demand for rides and rates are at their peak, making more dollars per mile.
- Dog walk or sit: People love their furry friends, but not every pet parent has time to walk and care for them. Dog sitting for individuals on vacation and business travelers is a fun and lucrative side hustle for animal lovers.
- Test websites and apps: Companies are looking for users to try out websites and apps to ensure they are user-friendly. Sign up with testing firms such as User-testing or Testbirds to make more money by sharing your feedback.
7. Cut Down Your Debt
Using your income to pay off debts may seem counterintuitive since you are on a mission to purchase a home. Nevertheless, one of the things creditors look for when verifying your eligibility for a mortgage is your debt-to-income (DTI) ratio.
Having more debt isn’t good since you might not qualify for a mortgage. This also means you will pay more interest and have a high down payment prerequisite.
So, pay off some debts before seeking a mortgage loan. Check the amount you owe on all credit cards, student loans, auto, and personal loans. Then, formulate a plan to pay.
8. Rent Your Parking Space or Extra Space
If you have a spare room you don’t use, list it on Airbnb. With this site, you will control the guests you accept and when. You can also approve guests and dates ahead of time and host them when it’s only convenient.
If you reside in a city with scarce parking space, you can rent out any of your allocated parking spaces with apps such as JustPark.
If you’ve been wondering, how much money should I save before buying a house? Now you have an answer! Purchasing a home is expensive. However, that doesn’t mean you should spend a leg and arm. You can avoid spending on unnecessary expenses by sticking to a budget.
Furthermore, saving up a high down payment will help reduce your monthly mortgage payments and possibly get lower interest rates. And if you can set aside a lump sum amount of money, you can purchase the property outright and become a homeowner!