How to save money for a house

1. Figure out how much you need to save

Before you even start saving, your first step should be estimating how much money you need. The amount you need to save mostly depends on the cost of your future home, so calculate how much home you can afford given your current financial situation and go from there.

You don’t need to save enough to buy a home outright if you’re financing, but you will need enough money saved to cover a down payment, the closing process and other related expenses, like moving costs. These costs add up, and they can leave you in a pinch if you haven’t planned properly.

How much to save for a down payment

Many mortgage lenders require a down payment, which is an initial payment based on a percentage of your new home’s sale price. Lenders often have a set minimum for your down payment, but you can also choose to put down more than the minimum to cash in on certain benefits.

A common misconception is that you must put down 20% in order to secure a mortgage. While putting down 20% does have some benefits (like letting you avoid private mortgage insurance), it’s often not required.

In fact, the median down payment for first-time homebuyers was 12% over the year ending in July 2020, according to the National Association of Realtors. Among those from age 22 to 30, the median down payment was 6%; among those 31 to 40, it was 10%. On a $250,000 home, a 6% down payment would require $15,000 in cash due at closing, and a 12% down payment would require $30,000.

It’s important to note that the exact down payment you need depends on your lender and loan type. For example, conventional loans may require down payments of anywhere from 3% to 20%, while VA and USDA loans may not require down payments at all.

How much to save for closing costs

Closing costs are fees you pay to your lender at the time of purchase, which is called the “closing.” At a closing, you sign the necessary legal paperwork to not only gain ownership of the property but also enter into a contractual agreement with the lender. Essentially, the closing finalizes your home purchase.

Like down payment requirements, closing costs can also vary by lender and loan type. You should receive all estimated closing costs in writing before you enter into a mortgage. Under the federal Know Before You Owe disclosure rule, mortgage lenders are required to disclose all fees associated with the loan, like appraisal costs and the interest paid over the course of the loan. These fees are included in a document called the Closing Disclosure.

Since closing costs are quoted upfront, you can use this information to compare loans from different lenders. In general, closing costs will cost you between 2% and 5% of the home's purchase price. So, if a home is selling for $250,000, the closing costs could be between $5,000 and $12,500.

The good news is that you don’t necessarily have to pay your closing costs upfront. People often fold them into their mortgages to spread the cost out over time. However, this does mean that you’ll spend more on interest and have higher monthly payments. If you’re able, gathering the money for closing costs now can save you money in the long run.

How much to save for moving expenses 

Think about how much it will cost you to move into your new home and set a moving budget. Moving costs depend on factors like the size of your home, how far the move will be and whether or not you decide to hire a moving company.

Even if you intend on moving yourself, there are still costs to account for, like packing supplies and renting a moving truck. If you plan to hire a moving company, request quotes from multiple companies so you can compare rates and make sure you’re getting a good deal. In general, the average cost of a local move is between $80 and $100 an hour for a team of two movers. Long-distance moves that cross state lines usually cost from $2,000 to $5,000.

2. Make a plan and stick to it

Once you have an idea of how much you need to save, you can make a plan to achieve that goal. Think about both your timeline and your savings goal as you create this plan. For example, if you need $20,000 to buy a home in five years, you will need to set aside $4,000 a year (or about $333 a month).

Here are some tips to help you reach your savings goal. You don’t need to do all of these, but the more of them you can do, the faster you’ll save money.

Create a monthly budget

If you don’t already have a monthly budget, now is the time to create one. When drafting a budget, start by tracking your current income and expenses. Then, see where you can cut back, if necessary, to make room for however much you need to save each month.

Consider a budgeting tool that records transactions from your bank account and credit card to track spending.

There are budgeting tools available that record transactions from your bank account and credit cards to help you track your spending.

Your budget can also stay useful once you’ve purchased your home. Homeownership comes with many expenses, both planned and unexpected, and a budget can help you manage those costs effectively.

Cut back on expenses and avoid luxuries

Unless you already have extra money each month, saving for a house will likely come at the cost of giving up or reducing some luxuries you're used to having.

For example, you can replace daily trips to a coffeehouse with making coffee at home, or you can shop around for better deals on your current expenses, like car insurance and your phone bill. Staying focused on your goals can help you make the right spending choices today.

Set up an automatic paycheck withdrawal

One of the simplest ways to grow your savings account is to automate the process. Set up an automatic transfer on your payday so that a portion of your paycheck goes straight to your savings account. This way, money comes out of your checking account before you have a chance to spend it.

Pocket windfalls

If you unexpectedly receive a large sum of money, like an inheritance or a bonus at work, it can be tempting to spend it all at once. However, depositing these windfalls into your savings account can put your plan ahead of schedule.

If you must spend some of the money now, consider allowing yourself a small portion of these funds, like 10%, to splurge on anything you want while still setting aside the rest for savings.

Find cheaper housing or get a roommate

If your current living situation is too much for your budget, you may want to switch to cheaper housing. That could mean anything from getting a smaller apartment in the same complex to renting a different house in a less expensive area.

You could also ask your friends and family members if they're looking for a roommate to help offset their living costs as well. While living with someone else may not be your first choice, it can help you save a lot of money. Roommates often split the cost of rent, utilities and food, which can result in significant savings.

Avoid risky investments

Steer clear of any volatile investments or “get rich quick” schemes if you’re trying to grow your savings. While these opportunities may advertise significant upsides, the risk involved may send you back to square one.

A safer way to reach your financial goals is consistently and habitually setting aside funds for savings. Don’t gamble away your money on unproven investments.

Ask for a raise or get a new job or side job

Most of the tips above focus on reducing expenses, but you can also look for ways to increase your income. You can start by asking for a raise from your current employer. If that’s not possible, you might consider looking for a better-paying job. These tasks are easier said than done, but making more money is one way to increase your savings — hopefully without compromising your quality of life.

If neither of the above options is available or you want to supercharge your income, consider getting an additional job. Side gigs are a great way to keep your day job while also making some extra cash. You could become a driver for a delivery or ride-hailing service or explore freelance opportunities, like writing blogs or tutoring students. Just remember to put the extra money your make toward your savings.

3. Track your progress

Like with any other goal, it’s important to monitor your savings progress to make sure you’re staying on track. Budgeting software can give you a clear picture of your spending and even make recommendations for saving more money. If you aren’t progressing toward your goal as quickly as you'd hoped, look for where you waste the most money and make any necessary reductions.

You should also stay informed about any changes in your local real estate market to ensure that your savings goal is still accurate. If home prices are rising rapidly, you may need to increase your savings goal, and this may cause you to push back your timeline.

Consider subscribing to recurring emails from real estate websites to see the prices of homes in your area that fit your criteria. A real estate agent can also speak with you about market conditions and help you adjust your expectations.

Bottom line

Homeownership is attainable if you have the right savings plan in place. Start by creating a plan for saving money, then manage your budget and track your progress, adjusting as necessary until you’ve reached your goal. Once you’re ready to buy, you can start shopping for your new home and applying for financing.