How To Know When You’ve Saved Enough To Buy a House

Yaёl Bizouati-Kennedy, GO Banking Rates, 5 April 2023

The housing market has been a difficult one lately, as inflation, soaring rates and short supply made for a bad combination for potential homebuyers. And a new problem is appearing, with banks potentially tightening credit lending. Yet, becoming a homeowner remains a goal to many Americans.

But being financially ready to buy a home entails a lot of planning, as there are several factors as well as additional costs homebuyers should take into consideration before making the jump.

The Down Payment Is Just the Beginning 

First off, there is the matter of the down payment, but there are several other costs that come along with homeownership that might not be obvious or might be overlooked.

“Purchasing a home is more than just saving for a down payment,” said Andrew Latham, director of content of SuperMoney.com. “It’s about being prepared for the entire homeownership journey, which includes unexpected costs and life’s curveballs.”

In turn, Latham said that a holistic approach to saving for a home means having a safety net for repairs, emergencies and life changes.

“When calculating how much you need to save to buy a house, don’t forget the hidden costs. Moving expenses, closing costs, and potential upgrades or repairs should all factor into your savings plan. By considering these additional expenses, you’ll be better prepared for the realities of homeownership,” Latham said.

While every case is different, a good rule of thumb when determining whether you have enough money to buy a home is to save enough for the down payment plus three to six months’ worth of living expenses in an emergency fund and 2%-5% of the home’s value for closing costs and additional expenses, Latham recommended.

To put this in context, a Hippo survey found that 78% of U.S. homeowners have had regrets about purchasing their homes within the last 12 months, with a whopping 49% of them saying homeownership is more expensive than they anticipated and 47% saying that they have had too many unexpected issues with their home.

Here are some costs associated with homebuying.

Have Enough Money for a Downpayment

For first-time homebuyers, the average down payment is around 6%, while it’s 13% for repeat buyers, according to the National Association of Realtors. And the national median list price grew to $424,000 in March, up from $415,000 in February, according to Realtor.com. This already represents a good chunk of money to set aside.

“The first step in knowing when you have saved enough to buy a house is to make sure you have a healthy downpayment for the home of your choice,” said Shaun Martin, CEO of We Buy Houses in Denver. “Generally, lenders prefer 20% down but that may vary depending on certain factors. This means you should aim to save 20% of the total cost of the home, including closing costs and other fees.”

Be Ready for Repairs and Remodels

In general, a good rule of thumb is to set aside 1% to 4% of your home’s value for a home maintenance fund, according to State Farm. Another tip is to make a list and prioritize repairs and maintenance costs based on age.

“For example, if your roof is 20 years old, you probably have just a few years before you need to invest in a replacement. When it comes to a 5 year old furnace, on the other hand, you may not need to save for another decade,” according to State Farm.

There are also differences when it comes to the types of homes, specifically between a new build and a remodel.

“Building a new home with an established production builder provides a clear and reliable ‘all-in’ number before you even sign a contract,” said Shannon Livingston, president of RREAF Communities.

Livingston explained that a remodel can be difficult to accurately budget because there are more unknowns and unforeseen issues often arise.

“Issues with the foundation, plumbing, wiring, and HVAC systems tend to be items that need attention. These translate into unexpected and unbudgeted costs,” Livingston said. “When considering the purchase of a home for remodel it is always a good idea to engage a home inspector and a structural engineer to preview and provide feedback on the condition of the home.”

Prepare Moving Expenses

When you purchase a home, you will likely need to move and it is important to have funds set aside for this purpose as well.

You can calculate the estimated cost of your move based on the distance, the size of items and the number of movers needed, Martin said.

It’s good to know that for a two-person moving team doing a local move under 100 miles, the national average cost of moving is $1,400 with a range from $800 to $2,500, according to Forbes. Meanwhile, for long-distance moves, the average cost of movers gets much more expensive, ranging between $2,200 and $5,700.

Budget for Life’s Curveballs

Finally, budgeting for life’s unpleasant and unexpected surprises is also a very important component of homebuying. For example, a layoff will put a dent in one’s finances, and so would costly medical expenses.

In turn, building an emergency fund is key to financial stability.

“While we often hear of the need to establish a liquid fund for emergencies, most people never decide to quantify the goal amount needed,” said Holley G. Cary, CFP, vice president and senior financial planner at First Horizon Advisors. “Set a goal of saving an amount equivalent to six to nine months’ worth of ongoing expenses in an easily accessible savings account.”

Cary recommends using a systematic amount to automatically save each month and get started.

“And remember that if you have that emergency along the way and need to tap into the account, don’t stop saving systematically in order to build back up. You can also save for unexpected healthcare expenses by contributing to a Health Savings Account (provided you have a high deductible healthcare insurance plan) or by setting up a Flexible Spending Account through your employer to cover allowable expenses. Having a plan for the unexpected and putting it in place can ease the stress of an already difficult situation when the need arises,” she added.

This article originally appeared on GO Banking Rates