You’ve finally decided you’re ready for the homeownership journey. Congratulations! Homeownership is a fantastic way to build long-term wealth. Not to mention, it’s just really fun and exciting to have a space that’s all your own to design and decorate however you want! But before you get too ahead of yourself, let’s talk numbers. When it comes to purchasing a home, how much money do you need to have saved? Read on to find out.
How much money you need to save in order to buy a home depends on a few different factors. Down payment size, credit score, current debts, employment history, and location all play a role in how much money lenders are willing to give you and at what interest rate.
As a general rule of thumb, you should expect to need a minimum of 5% of the purchase price of the home saved for a down payment. So, if you’re planning on buying a $200,000 home, you would need at least $10,000 saved for the down payment. Keep in mind, though, that this is just the minimum amount. If you can manage to put down 20% of the purchase price as your down payment, you will avoid having to pay for Private Mortgage Insurance (PMI). PMI protects the lender in case you default on your loan but adds an additional monthly cost to your mortgage payments, so it’s best avoided if possible.
Your credit score is also going to play a big role in how much money lenders are willing to lend you, and at what interest rate. A higher credit score means lenders see you as less of a risk and are more likely to offer you favorable terms on your loan. If your credit score is on the lower end, don’t despair—there are still options available to you but expect higher interest rates and/or smaller loan amounts. Speaking with a local lender or financial advisor can help give you more insight into what kind of loan terms you can expect given your unique financial situation.
Your employment history is another important factor that lenders consider when evaluating your loan application. Longer employment history with steady income increases your chances of being approved for a loan and also may increase the size of the loan for which you get approval. In short, how much money you need saved, to buy a home, depends on several factors, including down payment size, credit score, current debts, employment history, and location. As a general rule of thumb, plan on needing at least 5% of the purchase price (there are 3% and 3.5% programs available, too) for a down payment but keep in mind that putting down 20% will help avoid paying private mortgage insurance (PMI). Your credit score and employment history will also play big roles in determining how much money lenders are willing to lend you and at what interest rate.
Still have questions?
Don’t worry! Speaking with a local lender or financial advisor can help give more insight into what kind of path forward makes the most sense for your unique financial situation. Happy house hunting!
