How Much Should I Save Before Buying a Home?

Most people I talk to are saving toward a number they picked years ago and never checked. Some are aiming far too high and putting off a purchase they could make sooner. Others will hit their goal and find it doesn’t cover the move. Here’s how to set a target you can trust, and how to save it so a lender can see it clearly.

Your number has three parts

A savings goal for a home isn’t one figure. It’s three, stacked on top of each other.

The first is cash to close: your down payment plus closing costs and prepaids. I break each piece down in how much money you really need to buy a home, and the difference between closing costs and cash to close is worth understanding before you start.

The second is reserves, the money still in your accounts after closing. Many lenders want to see a couple of months of your full house payment, and some loans ask for more.

The third is a cushion of your own for moving, a few essentials for the house, and the first repair that shows up uninvited. The lender may never ask about it, and you’ll be glad it’s there.

Most people only save for the first part. The other two decide whether your first year as a homeowner feels steady or stretched.

Working out your target

Start with the price range you’re shopping in. From there, the pieces add up like this:

• Down payment: whatever share of the price you plan to put down. This is the piece you have the most say over.
• Closing costs and prepaids: often a few percent of the purchase price, depending on the loan, the area, and the home.
• Reserves: a couple of months of your expected full house payment, if your loan calls for them.
• Your cushion: moving costs and the first few things the house will need.

Add those up and you have a working target. For a lot of buyers it comes out well below what they assumed, because they’d been saving toward a full 20% down before even counting closing costs.

If you’d rather put down less, there are loan programs built for that, and some eligible buyers may qualify with little or nothing down, depending on qualifying factors. A smaller down payment usually means mortgage insurance and a higher monthly payment, so the right amount depends on what you want that payment to be. Your own numbers will depend on the home, the loan, and your situation, which is why I’d rather walk through them with you than guess here.

How long it might take

Once you have a target, the timeline is simple: subtract what you’ve already saved, then divide by what you can set aside each month. That gives you a rough date to work toward.

One habit I suggest to nearly everyone: save your future payment now. Take the difference between your rent and the house payment you’re expecting, and move that amount into savings each month. You’ll find out whether that payment actually fits your life, and you’ll build the fund while you test it. If it feels too tight after three or four months, that’s useful to know before you sign anything.

Where to keep it

Money you plan to spend within a year or two should be somewhere it can’t drop in value right before you need it. A high-yield savings account or a money market account is the usual home for it. Stocks can be a fine place for long-term money, but a down payment that drops in value the month you go under contract is a hard way to learn that lesson. Whether to move investments, and what that means for taxes, is a question for your CPA or financial advisor.

Keep it in as few accounts as you reasonably can. Every account you use for the purchase is another set of statements to provide.

Save it where a lender can see it

This part surprises people. Underwriters typically review your last two months of bank statements, and they look at more than the balance. They want to know where the money came from.

Paychecks landing on schedule are easy. A large deposit that isn’t from your employer needs an explanation and usually a paper trail: the sale of a car, a tax refund, money moved from your own brokerage account. Cash is the hard one. If you’ve been keeping savings at home, deposit it well before you apply, ideally several months ahead, so it’s part of your normal history instead of a question. The documents needed for a mortgage post covers what you’ll be asked to show.

If family is helping, that’s allowed on most loans, and it comes with its own paperwork. I’ll cover gift funds in more detail soon. For now, the one thing to know is that I’d like to hear about a gift before the money moves.

When you’ve saved enough

You’ve saved enough when you can cover cash to close, keep your reserves, and still feel comfortable with what’s left. That might happen well before 20% down.

Sometimes the honest answer is to keep saving. If closing would leave you with nothing, or the payment only works on paper, a few more months of saving is the better choice. Buying a little later with a cushion is usually easier than buying now without one.

The bottom line

Build your target from three parts: cash to close, lender reserves, and a cushion of your own. Keep the money somewhere stable, deposit it early so it has a clean history, and practice the new payment before you commit to it. For many buyers, the real number is smaller than the 20% figure they’ve been chasing, and knowing it gives you a date to work toward.

Ready to learn more?

If you’d like help setting your own savings target, based on your price range, your loan options, and the payment you’re comfortable with, I’d be honored to work it out with you.