How Much Money Do I Need to Buy a House
8 Minute Read | December 03, 2021
So you're wondering, How much money do I need to buy a house? That's a smart question to ask, especially since buying a house can come with a lot of hidden expenses that are easy to overlook until closing day.
If you want your home to be a blessing and not a curse, we'll show you how much money you need in the bank to make your home-buying process as smooth as butter.
Ready? Set. Go!
How Much Cash Do I Really Need to Buy a Home?
If you're getting a mortgage, a smart way to buy a house is to save up at least 25% of its sale price in cash to cover a down payment, closing costs and moving fees. So if you buy a home for $250,000, you might pay more than $60,000 to cover all of the different buying expenses.
For a visual, here's what that home-buying budget might look like:
| Home Price: $250,000 | Buyer's Cost | Percentage of Home Price |
| Down payment | $50,000 | 20% |
| Closing costs | $10,000 | 4%1 |
| Moving expenses | $1,300 | <1%2 |
| Total buying costs | $61,300 | 25% |
See how much house you can afford with our free mortgage calculator!
If these numbers sound too steep, you're not alone. In fact, most buyers only saved up to 12% of their home price as a down payment last year—compared to a 20% down payment 30 years ago!3 So, what changed over 30 years to make home buyers stop saving up as much money before buying a home?
Well, student loans continue to top the chart as the number one reason today's home buyers (51%) are having trouble saving for a home purchase—followed by credit card debt (45%) and car loans (38%).4 That's why you need to get out of debt ASAP and have a fully funded emergency fund before buying a home.
To help you do this, check out Rachel Cruze's new book,Know Yourself, Know Your Money,so you can learn more about why you handle money the way you do, and what to do about it.
Customize Your Home-Buying Budget
After you're out of debt and have an emergency fund, the next thing you need to do is a little math to see how much house you can afford. If you're getting a mortgage, never buy a home with a monthly housing payment that costs more than a fourth of your take-home pay—otherwise you'd be house poor!
That 25% limit includes principal, interest, property taxes, homeowner's insurance and, depending on your situation, it also includes private mortgage insurance (PMI) and homeowners association (HOA) fees. Use our mortgage calculator to enter your down payment amount and try out different home prices within your budget.
If you want a smart mortgage you can pay off fast, talk to Churchill Mortgage about getting preapproved for a 15-year fixed-rate conventional loan—the cheapest type of mortgage and the only kind we recommend. Any other type of mortgage will drown you in interest and fees and keep you in debt for decades.
To safeguard yourself, here are some rip-off mortgages to avoid:
- FHA loan (Federal Housing Administration). Sure, an FHA loan will allow you to buy a house with a down payment as little as 3.5%. But in exchange, you'll be charged an extra fee for the life of the loan—on top of all the extra interest you'll pay and decades you'll spend in debt for not saving up a big down payment. Bad idea.
- VA loan (U.S. Department of Veterans Affairs). A VA loan helps veterans get into a house with no money at all! But when you purchase a home with zero money down and things change in the housing market, you could end up owing more than the market value of your home—yikes! Also, VA loans come with a funding fee. No thanks.
- USDA loan (U.S. Department of Agriculture). A USDA loan is designed to help people who can't really afford to buy a home yet to get into a house with zero money down. But again, that'll crush your budget over the years with all the added interest payments! Plus, if you can't afford to put any money down on a house, you're not in an ideal place to handle maintenance and all the other unexpected costs that come with homeownership.
Okay, now that that's covered, let's get a better idea of how much the individual home-buying budget items will cost in your situation by unpacking each category.
Down Payment
How much should you save for a down payment? As much as possible! But for reference, we recommend saving at least 20% of the total house price to avoid paying private mortgage insurance (PMI)—a type of insurance that protects your lender from losing money in case you can't make your mortgage payments.
Any down payment amount less than 10% is way too low! Yet, as we covered earlier, government-insured programs like FHA, VA and USDA are making it easier to buy a house with little to nothing down. But remember, going that route will have you paying so much extra in interest and fees that you'll sink your overall financial plan.
For a simple way to beef up your down payment as fast as possible, download our free Saving for a Down Payment Guide.
Closing Costs
Buyers typically pay around 3–4% of the home's sale price in closing costs.5 The term closing costs refers to fees for services that help to officially close the deal on a house. For buyers, closing costs usually include a home inspection (paid before closing day), appraisal and many other loan-related fees like paperwork processing fees, prepaid insurances and taxes.
To break this down a little more, a home inspection is when a pro examines your potential home from top to bottom to warn you of any issues or damage before you buy, which costs about $300–400.6 Get ready to double that cost (womp, womp) since it's about the same price range for the home appraisal—which is your lender's way of making sure the home is worth the amount of money they're loaning you.7
Those costs are small potatoes compared to other closing costs like title fees, taxes and loan origination fees. It's tough to calculate those exactly because they vary based on where you're buying a home, but they could each cost 1% of your home's sale price.
Moving Expenses
Don't forget to save up for moving expenses! Unless you're able to get enough friends with pickup trucks to help you transport all your stuff for free, you'll probably need room in the budget to help pay for your move. Since there are many ways to handle moving costs, like renting a moving truck or hiring a moving company, costs range anywhere from $650–1,800 for a local move.8
Can I Buy a House With Cash?
Okay, now you know how much money you need if you're buying a house with a mortgage. But what if you're a rock star at saving money and can actually pay for your house with 100% cash?
Check out the sweet benefits of paying for a house outright in cash:
- You'll be more attractive to sellers who'll likely choose you over the competition to close faster.
- You'll enjoy a faster home-buying experience by cutting out the lengthy loan-approval process.
- You'll avoid decades worth of interest fees (which can add up to hundreds of thousands of dollars).
- You'll skip extra loan-related fees like PMI.
- And, best of all, no mortgage payment!
Some people believe in a myth that it's dumb to buy a house in cash because they'll miss out on the mortgage interest tax deduction. But those people aren't doing the math.
For example, if you buy a home with a mortgage payment of $2,500, and the interest portion is $850 per month, you'll pay around $10,000 in interest the first year, which creates a tax deduction.
And, sure, you lose that tax deduction if you buy a home with 100% cash. But let's see what this really means. If you're in a 22% tax bracket—without that $10,000 mortgage interest deduction, you'll have to pay $2,200 in taxes on your $10,000 earnings.
Here's the kicker: According to the mortgage tax advantage myth, we should send $10,000 in interest to a mortgage lender to avoid sending $2,200 in taxes to the IRS. Would you really want to pay $10,000 in mortgage interest just to save $2,200 in taxes? Of course not!
Besides, with the new higher standard deduction, many homeowners will save more money by choosing the standard deduction than by taking the mortgage interest deduction anyway! For reference, the standard deduction for 2020 is $24,800 if you're married filing jointly or $12,400 for individuals filing separately.9
Bottom line: If you can buy your home with 100% cash—without touching your emergency fund or sacrificing other financial goals—it's totally worth doing!
Buy a House With a Top Real Estate Agent
If you're already in good shape and saved enough cash, get the ball rolling on your home purchase by working with a real estate agent. We make it quick and easy for you to find the best-performing agents through our Endorsed Local Providers (ELP) program. The agents we recommend make it their mission to help you find a home that allows you to keep all your other financial goals in balance.
Find top real estate agents!
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
How Much Money Do I Need to Buy a House
Source: https://www.ramseysolutions.com/real-estate/how-much-money-do-i-need-to-buy-a-house