First Steps

How Much Money Do I Need to Buy a House?

Published on: March 14, 2022

how much money do I need to buy a house

The first question most new homebuyers ask is: How much money do I need to buy a house? The answer varies depending on the price of the house, the size of your down payment, the kind of mortgage you choose, and the closing costs that come with your loan. 

The answer really has two parts. You need to have money saved to pay the upfront costs of buying a home, and you need an adequate income to make monthly mortgage payments along with your other monthly bills and financial obligations. Let’s explore how much savings and income you’ll need to buy a house.

How much money should I save before buying a house?

If you think you need to save a 20% down payment before you can buy a house, you’re not alone. More than one-third of consumers incorrectly believe that buying a house requires 16% to 20% down, according to a survey by the National Association of Realtors (NAR). 

While putting down 20% can get you a better interest rate and prevent you from paying for expensive mortgage insurance, you can get a mortgage with a much lower down payment. NAR found that the median down payment was 12% for all buyers in 2019. For first-time buyers, the median down payment was 6%.  

Some mortgage programs accept down payments as low as 3%. In that case, you’d need to save $9,000 for the down payment on a $300,000 house, which sounds more doable than having to save $60,000 to put 20% down on the same home. 

However, you’ll need to save for other costs of buying a house, including closing costs, repairs or renovations you want to make immediately, and moving expenses.  

You’ll also need to keep some money in reserve as an emergency fund. Reserve funds can cover unexpected repairs or mortgage payments if you lose your job. Fannie Mae requires some buyers to have the equivalent of between two and six months of mortgage payments in a reserve account for loan approval. If that requirement applies to you and your monthly payment is $1,800, you’d need between $3,600 and $10,800 available as your reserve funds.

How much income do I need to buy a house?

How much income you need to buy a house depends on the cost of the property, other debts you owe, and the down payment you make. Use a mortgage affordability calculator to determine how much income you’d need to comfortably make the monthly payments.  

Lenders will look at both your income and level of debt to determine the size of mortgage you qualify for. 

Monthly income 

Lenders must determine that you have the income necessary to repay the loan before they grant you a mortgage. The lender will confirm your income, other debts you’re obligated to pay, credit history, and other factors to determine whether you can afford the monthly payments.  

Generally, lenders want your mortgage to consume no more than 35% of your monthly income. Many lenders will limit your mortgage payment to 28% of your monthly income. 

Debt-to-income ratio 

Your debt-to-income (DTI) ratio compares your total monthly debt to your monthly gross income. Your DTI includes obligations such as car payments, student loans, and the amount you pay on credit cards each month. It also includes the amount you’d pay on a mortgage. 

When you apply for a mortgage, the lender will look at your DTI in two ways. 

  1. The front-end DTI is the ratio of what you pay for the mortgage and related expenses, such as property taxes, compared to your monthly income. 
  2. The back-end DTI includes the housing debt along with all the other monthly debt payments you have to make. 

You may have heard of the 28/36 rule of thumb, which suggests that no more than 28% of your income should go toward your mortgage, and no more than 36% of your income should go to paying off all debts, including your mortgage. However, some loan programs accept applicants whose back-end DTI ratio is up to 50%. 

The best way to determine how much you can afford is to go through the preapproval process. You’ll fill out a loan application, and the lender will check your credit, income, and employment history. The lender will tell you the size of the mortgage you could qualify for. Including your preapproval letter when you make an offer on a house can help show the seller that you’re a serious buyer.

What are the upfront costs of buying a house?

In addition to the down payment, you’ll have to pay other upfront costs when buying a house. You’ll have to pay closing costs and may also need cash on hand for earnest money, home inspections, and other professional services. 

Sample out-of-pocket costs of buying a house 

Here’s what you’ll need to purchase a $250,000 home: 

Loan type  Down payment  Loan amount  Closing costs (1)  Cash reserves 
Conventional (20% down) $50,000  $200,000  $2,000-$10,000  None 
Conventional (3% down)  $7,500  $242,500  $2,425-$12,112  2-4 months (2) 
FHA (3.5% down)   $8,750  $241,250  $2,412-$12,062  1 or more months (3) 

Notes: 

  1. Based on 1%-5% of loan amount 
  2. Varies depending on credit score and DTI 
  3. Depends on credit score and debt ratios 

Closing costs 

Closing costs can range from 3% to 6% of the loan amount and may vary based on location and loan program. Closing costs include charges such as a loan origination fee, appraisal fee, title insurance, mortgage points, and other third-party charges.

Down payment requirement 

Various loan programs have different down payment requirements. Conventional mortgages with the best terms require 20% down. But if you don’t have that much money, you may qualify with a smaller down payment. Programs such as Fannie Mae HomeReady® and Freddie Mac Home Possible® accept buyers with down payments as low as 3%. 

However, when you put less than 20% down, you must pay for mortgage insurance, which increases your monthly payment. Even zero-down-payment VA loans require a funding fee, which is similar to mortgage insurance. 

Cash reserves 

Your lender may require you to have cash reserves. For example, with an FHA loan, you may be required to have two to six months’ worth of mortgage payments in the bank.  

Even if the lender doesn’t require cash reserves, it’s a good idea to have savings set aside for emergencies. When all your money is tied up in your home, you’re “house poor” and could run into financial difficulties if you lose your job or face a medical emergency.

How to save money for a house

Saving enough money before buying a house can be daunting, but it is possible. Here are some tips to help you reach your goal. 

Consider first-time homebuyer programs. Many government agencies and community organizations offer first-time homebuyer programs to help new buyers. You may find low-down-payment loan programs, down payment assistance programs, and tax credits to help you buy your first home. 

Look for ways to save more. For example, you might eliminate some streaming services, cook at home more, get a roommate, or enjoy a staycation rather than traveling. 

Find ways to increase your income. Ask for a raise or offer to work overtime. Consider taking on a part-time second job or starting a side hustle. 

Reduce the amount of savings you need. A less expensive house means a lower down payment, so it reduces how much money you need to save before buying a home.  

Wondering if you’ve saved enough to buy a house? Talk to a local Finance of America Mortgage Advisor today  to explore your mortgage options.

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