After graduating from college I moved to San Francisco and even back then home prices were crazy. I happily moved into a budget-friendly rental and the idea of buying a house never even crossed my mind. But a year or two later an acquaintance bought her first home. Another person followed suit. And then another.
I was perplexed: how do people afford houses?
I was living in the dining room of an apartment, and while I was able to save, I wasn’t saving nearly enough to have a down payment on a house.
It turns out, I wasn’t alone. Two-thirds of renters surveyed said that saving for the down payment was their biggest hurdle to homeownership. And when you’re looking at tens of thousands of dollars — if not more — to get you into the buying game, there’s likely not enough lattes you can cut from your budget.
How do homebuyers afford a down payment?
While I wasn’t about to quiz every homeowner I knew about how they came up with the funds to purchase a house, some people were eager to share without needing to be asked. The buyers I knew fell into three camps: some people put less than 20% down, others used money from family, and some needed to borrow a little from their 401k to make they homebuying dreams come true.
My group of friends was pretty representative of how the research breaks down. According to Zillow, less than half of millennial homebuyers put down 20%. Over half used a gift or loan from family and friends to put down a down payment. And first time homebuyers do turn to their retirement and investment accounts to help fund the purchase.
Even with those three factors, it’s still very difficult to buy a home. US home prices are expected to increase at twice the speed of infation and wages. It’s no wonder that the homeownership rate for millennials is only 37%.
How much do you need to save to buy a house?
Even with all those obstacles, 80% of millennial renters say they want to buy a house. So how much do you actually need to have saved? Here are some of the things you should have cash set aside for:
Because the down payment is likely going to be your largest home-buying expense, start your cost estimations here. First thing to know: how much do you want to spend on a house. I recommend looking at a calculator to see how much house you can afford. But I also recommend taking some time to look at your budget and how much you want to spend each month on a house payment. Just because the bank says you can afford something doesn’t mean you should. Remember the housing crisis?
Whenever I’m looking at different financial options, I like to use Personal Capital to run through scenarios. They have a great retirement planner and you can input things like a house purchase to see how it affects you long-term. The tool can be a little tricky to use so I created this tutorial to help you get started.
Once you know the max you’re willing to spend on a home, you can calculate how much you need for a down payment. There are different options starting at 3.5% for an FHA loan, while there are also special programs like VA loans and USDA home loans which both require nothing down. It’s worth noting though that in some cases if you don’t put 20% down you will need to private mortgage insurance (PMI).
So far we’ve been talking only about the down payment in this article. But closing costs aren’t cheap: they can range from 2%-5% of the purchase prices. And they need to be paid — you guessed it — at closing. So you’ll need to have this money ready to go along with your down payment.
If you’re draining every last penny from your savings account, your lender might not be so thrilled. Some lenders require borrowers to have cash reserves on hand, once the mortgage closes. But some good news here: according to FannieMae, cash reserves don’t need to actually be in cash. It can include vested balances in your retirement account among a few other things.
This technically isn’t required by anyone, but it’s something I’ll include from our own personal experience. The weekend we closed on our home, we spent $4,000 on incidental items: a shower door, washer/dryer, faucet, etc. We were fortunate to have free labor from our parents and Jordan’s dad installed a gas line that our house needed, saving us a lot.
These costs took us by surprise. We’d just nearly zeroed out our bank accounts and spending so much so quickly was uncomfortable, to say the least.
(Related read: The unexpected costs after buying our house, that cost us thousands).
Cost of moving
Of course, you’ll actually want to move into your new home, and depending on how much you have to move and how far you’re moving, the costs may add up.
How do you get enough money to buy a house?
You need the dollars to make the down payment — as well as pay for all of the other costs listed above. So how do you do it? Let’s talk through some strategies.
Does it make sense to buy a house?
Contrary to popular belief, it doesn’t always make sense to buy a house. If you’re renting and worried about “throwing away money on rent”, remember that at the beginning of your homeownership journey, you’ll be throwing away money on interest. Very little of your payment actually goes to the principle on your home.
It’s important to take a step back and make sure that owning a home is the right decision for you and your personal situation. Just because everyone is doing it, doesn’t mean you should too.
Before you decide, you might want to read: Is homeownership really the right move for you?
Decide how much you need
Those costs up top? It’s time to add them up. Break out the calculator and get a rough estimate of your down payment, closing costs, reserve amount (required by the bank or not, it’s good to have money you can use in emergencies), maintenance/moving, and updates.
Once you have your total, subtract what you already have saved for the house. This is the difference that you’ll need to save, in order to make your home buying dreams come true.
Determine your timeframe
How soon are you looking to buy your home? It’s this a “I’d like to move into my own home asap, so let’s get going!” or a “In three to five years it would be nice to be in my own place.” Get realistic and specific about your timeline because that will impact your savings plan.
Make a savings plan
Now you know how much you need to save and how soon you’d like to save it, it’s time to put together a plan to get there. Here are a few options:
One of the most overlooked ways to save more money is to actually earn more money. Maybe you’re due for a raise or maybe you have a side business you’ve always wanted to start. Earning more can significantly cut the time it takes for you to save for a house.
Earning more money doesn’t need to be difficult. Drive uber. Walk dogs. Bartend weddings. Take your skills and moonlight on the side. Become a freelance writer.
(Related read: create your plan B with multiple income streams)
No one likes to talk about cutting fun things out of their life. But you may want to cut back on what you spend to accelerate your home-buying savings. If your purchase is still years out, can you find a cheaper rental and put the money you save in the bank? What about biking or taking public transportation to work?
If you’re looking for things to cut without being miserable pinching pennies, this is the best thing you can do. It’s time to stop your money leaks.
Once you’ve settled on how much you want to save each month towards your house, open a savings account just for that purpose and start making automatic savings into it. Take the willpower out of it. Then you won’t have to choose between taking a weekend trip with your best friend for her birthday or saving for your house. It will just happen and you have no choice in the matter.
Bank any windfalls
There will be times during the year when you end up with unexpected cash. It can be as big as a bonus or a tax refund. Or it might be as small as a $25 birthday check from great Aunt Irma or $30 for returning a sweater. It doesn’t matter. Treat it all like found money and stash it in the house savings account.
Optimize your housing
If you’re not as concerned about the down payment as you are about the monthly cash outlay a mortgage will bring, you might want to consider different ways to ease the cash flow pain. Research options like buying a duplex or purchasing a home with a permitted in-law unit. Or, consider bringing in a roommate. Having extra rental payments each month to help you offset the mortgage (or pay it off early) can be a huge financial win.
How we bought our house
I wish I had some incredible story to share about how Jordan and I finally saved enough for a down payment on a house. But since I’m always curious about how other people manage to pull off this financial feat, I thought I’d share our path as well. It came down to three things:
- We lived cheaply: Remember how I said I lived in a dining room? Well, Jordan lived in a very cheap shared apartment for a few years. Then, I moved to North Carolina for school and got a roommate, paying even less in rent. Jordan was transferred overseas and lived at work (literally, they had housing on-site), and he continued to make his rent payment into his savings account. These small housing moves added up significantly.
- We didn’t adapt to our increased incomes: We bought our house approximately nine years after we graduated from college. During that almost decade, our incomes went up a lot, and our expenses didn’t. Sure, I moved out of a dining room. But we’ve bought and driven old cars, learned how to see the world on a budget, and sent most of our additional earnings automatically into savings.
- We chose a different city: This was a huge help. We broadened our search criteria. Once we got serious about buying a home, we didn’t focus in on the one place we wanted to live. We zoomed out — way out — on the map and started considering alternatives. Eventually, we found an alternative city that we loved and was 30% cheaper than any other place we had considered.
There’s (probably) no magic solution
Buying a house is a long, hard, and expensive process. But with some intentional effort with your money, you’ll eventually get there (and probably throw yourself an awesome housewarming party).
Erica Gellerman, CPA
Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project: a weekly money newsletter you actually want to read. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker. When she's not writing about personal finance you can find Erica exploring Europe from her temporary home base in London.
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