How to Start Saving for a House

Most people know that a home is probably the largest single purchase they’ll ever make. But many first-time buyers underestimate the amount of cash they will need to purchase their dream home.

If you don’t have money to cover the costs associated with buying a home, how will you save for it? To begin, set up a separate home-buying account. Then, follow any or all of these six suggestions for one year and see how much you’ve got in the account.

Key Takeaways

• Homebuyers can expect to pay between 3-20% of the purchase price as a downpayment.
• Closing costs range between 2-5% of the purchase price.
• Moving expenses can fall in the hundreds or thousands of dollars.
• Find ways to save money: move in with family and/or scale back on purchases.

Breaking Down the Costs

The first major cost is the down payment. Though first-time buyers can put 3% down and FHA loans start at 3.5% down, most buyers can expect to spend between 5% and 20% of the purchase price on a down payment.

Then, there are the closing costs required to complete the sale. These vary greatly because of differences in state and local regulations and taxes, but typically they range from 2% to 5% of the home’s value.

And don’t forget about moving expenses, which can easily run into four figures for a pack-rat or a family. Some save by fulfilling this duty without the help of professional movers. Doing it alone can save hundreds or thousands of dollars. However, it is labor-intensive and requires a significant amount of time.

1. Pay Yourself

According to Michaela Pagel, an associate professor at the Olin Business School at Washington University, the very first thing you should do to start saving for a home is to get your accounts in order, starting with your paycheck.

“Set up an automatic withdrawal to an investment account for the day after you receive your paycheck. This way the money cannot burn a hole into your pocket,” she said. But she went on to caution that you should do this only after repaying any high-interest, unsecured debts, such as credit cards.

2. Invest Your Windfalls

If you get a bonus at work, a tax refund, or some other unexpected sum of money, don’t splurge. Put the cash in your home-buying account. Consider high-yield savings accounts so your money can grow with time.

3. Get a Cheaper Place

If you’re living in a rental now, consider moving to a smaller, less-expensive one or getting a roommate to share the costs for your current place. A $300 per month reduction in rent will save you $3,600 annually.

If you’re single, consider living with family or friends for a year. RentCafe marks the average U.S. rent as $1,739 as of November 2024. Using this figure, you could save quite a bit per year.

Warning

Housing discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development (HUD).

4. Save Less for Retirement

If possible, don’t withdraw money from a retirement account or borrow against it. You will either repay your loan with interest or be subject to a penalty for withdrawing the money if you’re under age 59 ½. Instead, scale back your contributions a bit until you get into your home.

For example, if you’re contributing more than the company match in a 401(k) plan, maybe you can trim it back and put the extra cash into your home fund.

5. Cut the Luxuries

If you’re saving for a home, you’ll naturally be wary of making any big purchases, such as long vacations or expensive clothes. But watch the little stuff, too. A cocktail in a bar can cost $16 these days. Even if you keep it to two drinks a week, that’s $1,664 that you could be putting into your home fund over a year.

Budget your cash strictly, and put the savings in your home account.

6. Trim Routine Expenses

If you give it some thought, you might conclude that some of your monthly ongoing expenses can be eliminated. Cut the cord on cable television. Get a cheaper cell phone plan. Quit your gym and bicycle to work.

You may find you don’t even miss these things, especially when you put the equivalent amount of cash into your home account.

What Is the Average Down Payment?

The National Association of REALTORS (NAR) found that most first-time homebuyers pay between 6% and 7% as a down payment for a house or condo.

How Much Are Closing Costs?

Closing costs vary. They’re usually between 2% and 5% of the cost of the home.

What Is the Typical Down Payment for an FHA Loan?

The standard down payment for an FHA loan for lower-income earners is 3.5% of the purchase price. It’s worth noting that these FHA loans may be difficult to obtain.

The Bottom Line

You should start saving for a home as soon as the desire to buy one crosses your mind. It’s likely going to be the biggest thing you ever buy, so planning is key. If you follow these tips, you’ll be well on your way to your goal. Keep at it, and eventually, you’ll have saved enough—though remember, it’ll likely take years.