If you’re getting started saving up for your first house you may be wondering how much money to do you need to save up to buy a house. Do you need to save up 20%, 5%, or 100%? While there are many different opinions on the matter, I’ll try to give you a straightforward answer depending on your goals. The easiest way to determine this is to answer the following questions:
- Do I plan to live in this house?
- What is my risk tolerance?
- What is my savings rate?
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Do I plan to live in this house?
If you’re buying this property as a primary residence, which is what I recommend everyone get started with, then the risk is much less than buying purely an investment property. You will likely be there most of the time. And because you’re always there, you’re probably going to notice things that need repair, improve the place, and in general keep up with the property. Furthermore, as this is your home you’re not as likely to miss payments as you would be with an investment property.
The banks agree, and so you’ll see the minimum down payment requirements for primary loans are much less than investment homes. A pure investment property generally requires 20-30% down. Currently, the lenders I’m seeing are requiring 25% down. Down payment requirements vary depending on the loan product but currently, there are 5% down conventional loans, 3.5% down FHA loans, and 0% down VA loans.
My recommendation with current interest rates (~5% for a 30-year conventional fixed-rate loan) is to put the minimum down. As I write this there is also a high inflationary environment of ~7% inflation per year. In this case, because you’re interest rate is less than inflation you’re essentially making money by taking out debt. I also believe that having extra cash in the bank (or high interest, relatively safe account) allows you to feel psychologically secure, more at ease, and allows you to capitalize on deals as they present themselves.
It is true that putting more down will lower your monthly payment, but if the house payment is too large at 5% down, then it is probably too much property for your budget. Since I recommend putting the minimum down and letting market forces and loan paydown build your equity, the amount you need to save up depends on whether this is for investments (25% down) or to live in (5% down).
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What is my risk tolerance?
So far we’ve talked about the loan itself and the minimum requirements for down payments, but there are other costs associated with buying (and especially selling) property. For a 100-300k property, I would estimate about 2% of the purchase price in general fees. Luckily you can roll most of these costs into the loan usually. You’ll also want to ensure that you have reserves. In this case, as well, most lenders require that you have enough money to cover 3-6 months of payments in the bank before they give you the loan. I would put this at an additional 2-5k. Lastly, there are out-of-pocket costs such as appraisals and inspections.
When you put all this together you need 5-10k over the down payment to purchase a home.
If you have a high-risk tolerance, you can simply save up just enough to purchase the property and leave a few thousand in the bank. I’ve done it, several times…. But I realize that I got very lucky both times. Also, I was really stressed out both times. The FOMO can be really strong! In hindsight, I realized that my risk tolerance was not as high as I thought. If the thought of losing money, or you’re very tight on finances, then you may want to save up a bit more just to be safe.
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What is my savings rate?
Your savings rate will directly influence your risk tolerance. If your mortgage costs $1,500/mo. and you’re saving $4,000/mo. you’re going to feel very comfortable. But if instead, you are only able to save $1-200/mo then that mortgage will feel very oppressive.
If you have a high savings rate compared to your housing cost then you can afford to save up less as you will be able to quickly save up money going forward.
So how much money do I need?
Putting all of that together, you need to save somewhere between 7% to 35% of the purchase price of the property. If you’re just getting started with your first primary residence, then you’re looking at closer to 10% of the property to be safe. On a typical $300,000 house, this is $30k which is a ton of money, but not insurmountable.
