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Advice for Saving to Buy a House

written by: jciotta•edited by: Elizabeth Wistrom•updated: 7/14/2010

How much money do I need to save to buy a house? Learn the amount you should save when purchasing a home. We discuss saving tips and percentages you need to know.

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    Down Payment

    Down Payment Percentage How much money do I need to save to buy a house?

    Let's start with the down payment. The down payment is the portion of the total house price you can pay upfront. Before the housing market crash of 2008, a homeowner could put nothing down or a very little amount of money down. However, this is what led to the housing market crash.

    As a loan borrower in today's market, you must put down a certain percentage. The general rule of thumb to receive the best interest rate on the mortgage loan is save for a down payment of 20 percent of the total house cost. For example, if you are looking for houses around $400,000, you will need to put down 20 percent of that cost or $80,000. This is a massive amount of money to save, so how do you go about saving it?

    If you can live at a parent's house for a couple of years, many young people do this to save for either their first house or first condo or co-operative. Or if this is not possible, think about living with roommates or moving to a smaller apartment to save money. Also, many ambitious home owners get a second job for a few years to save for the extra money toward the down payment.

    Remember that you will only be approved for two and a half to three times your salary for a mortgage loan. Thus, if you make $45,000 a year, you will be approved by the bank or a lending provider for up to $135,000 total. With a $45,000 annual salary, the bank will not approve you for a $400,000 home. So keep your house buying price realistic and that will keep the down payment realistic.

    Both the 20 percent down payment figure and the mortgage loan approval rate are nationwide standards. However, to keep saving, it depends on the state you live in.

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    State Rules & More Saving Tips

    Home Buying by State Other costs a homeowner will need to save for depend entirely on the state. Each state has a different home buying process, some easier and some more difficult. For example, in New York state, the seller must pay the Realtors' fee, but in other states, this is not the case. Or in one state, appliances may automatically come with the house vs. another state where the buyer must negotiate for appliances.

    Check your state's home buying rules before entering into the process. This will give you a final number for saving overall.

    No matter what state, a buyer must save for closing costs, which are the miscellaneous fees charged by those involved in the process of buying the home. A homeowner must pay the lender to process the loan, local government offices for the deed, the title company for processing the paperwork, etc. -- these are all closing costs. Usually closing costs total around 10 percent of the purchase price.

    Closing costs are an unexpected hit for many home buyers, since they never budgeted for them. A potential homeowner should budget an extra 10 percent for closing costs, thus bringing the saving total to 30 percent. Also, if the buyer wants to immediately buy new furniture for the home or redecorate in any way and/or start immediate renovations, s/he should budget for this as well.

    How much money do I need to save to buy a house? Now that you know the answer to this question, make sure to check the home buying rules in your state for a final percentage. Then set out on your financial goal and save, save, save!

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    References

    "Buying a Home: Top things to know" CNNMoney -- money.cnn.com/magazines/moneymag/money101/lesson8/

    Photos by Simon Howden / FreeDigitalPhotos.net -- freedigitalphotos.net/images/view_photog.php?photogid=404