You should start saving for a house as soon as the desire to buy one crosses your mind. Most people know that a home is probably the largest single purchase they'll ever make. But many first-time buyers underestimate the amount of cash they will need to purchase their dream home.

Breaking Down the Costs

Perhaps the most important of home buying costs is the down payment. Generally, buyers can expect to pay between 2 and 5% of the purchase price. The standard rate for an FHA loan for lower-income earners is 3.5% of the purchase price. It's worth noting that these FHA loans may be difficult to obtain. It's more likely that a buyer will qualify for a mortgage that requires 5%, 10%, or even 20% down. For 2019, the National Association of REALTORS (NAR) found that 6% is the average down payment most buyers pay for a house or condo.

Key Takeaways

  • Homebuyers can expect to pay between 2-5% of the purchase price as a down payment.
  • Closing costs range between 2-5% of the purchase price.
  • Moving expenses can fall in the hundreds or thousands of dollars.
  • Find ways to save money - move in with family and/or scale back on purchases - to purchase the house.

Then, there are the closing costs required to complete the sale. These vary greatly because of differences in state and local regulations and taxes, but typically they range from 2% to 5% of the home’s value.

And don't forget about moving expenses, which can easily run into four figures for a pack-rat or a family. Some save by fulfilling this duty without the help of professional movers. Doing it alone can save hundreds or thousands of dollars; however, it is labor-intensive and requires a sufficient amount of time.

If you don’t have money to cover the costs associated with buying a house, how will you save for it? To begin, set up a separate house-buying account. Then, follow any or all of these six suggestions for one year and see how much you've got in the account.

Pay Yourself

According to Michaela Pagel, Roderick H. Cushman Associate Professor of Business at Columbia University, the very first thing you should do to start saving for a home (or anything, really) is to get your accounts in order. And, if you are able to, that means starting with your paycheck.

"Set up an automatic withdrawal to an investment account for the day after you receive your paycheck. This way the money cannot burn a hole into your pocket," she said. But she went on to caution that you should do this only after repaying any high-interest, unsecured debts, such as credit cards.

Invest Your Windfalls

If you get a bonus at work, a tax refund, or some other unexpected sum of money, don't splurge. Put the cash in your house-buying account. Consider savings accounts that earn interest so your money can grow with time. Also, it can be tempting to access excess funds; so, restrict access to the account or invest in an account that automatically restricts access.

Get a Cheaper Place

If you're living in a rental now, consider moving to a smaller, less-expensive one or getting a roommate to share the costs for your current place. A $300 per month reduction in rent will save you $3,600 annually.

If you're single, consider living with family or friends for a year. Yardi Matrix, an industry information service, marks the average U.S. rent as $1,412 as of September 2020 . Using this figure, you could save quite a bit per year.

Housing discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development (HUD).

Save Less for Retirement

If possible, don't withdraw money from a retirement account or borrow against it. You will either repay your loan with interest or be subject to tax withholding and possible penalties for withdrawing money. Instead, scale back your contributions a bit until you get into that home.

For example, if you're contributing more than the company match in a 401(k) plan, (congratulations on your smart planning), maybe you can trim it back and put the extra cash into your house fund.

Cut the Luxuries

If you're saving for a house, you'll naturally be wary of making any big purchases on fancy vacations or expensive clothes. But watch the little stuff, too. A fancy cocktail in a bar can cost $16 these days. Even if you keep it down to two drinks a week, that's $1,664 that you could be putting into your house fund over a year.

Budget your cash strictly, and put the savings in your home account.

Trim Routine Expenses

If you give it some thought, you might conclude that some of your monthly ongoing expenses can be eliminated. Cut the cord on cable television. Get a cheaper cell phone plan. Quit your gym, and bicycle to work.

You may find you don't even miss these things at least when you put the equivalent amount of cash into your home account.

Make More Money

Look for ways to earn a little extra money. Can you handle a part-time job? Do you have skills you can use in occasional freelance work? If so, put all of the extra pay into your house fund.