How Much Do You Need to Save for a Home Loan in 2025?

Most Americans need to get a mortgage to buy a home; current statistics state that 87% of home buyers use mortgage financing. But it is rare in 2025 to be able to buy a home for 100% of the purchase price. In most instances banks and lenders want the borrower to have skin in the game, so they require a down payment. It’s no secret that not every borrow will qualify for a mortgage with zero-down payment.

Many people believe that you must have a 20% down payment to buy a home. While having that amount of money down or more is ideal, it is not generally necessary. So how much money do you need to save for a home loan this year? Below is more information.

How Much Savings Do You Need for a Home Loan in 2025?

Embarking on the journey to homeownership is both exhilarating and daunting. A pivotal question that prospective buyers grapple with is: How much savings are necessary to secure a home loan in 2025? The answer hinges on several factors, including down payments, closing costs, and reserve funds. Let’s explore these components to provide a comprehensive understanding of home buying, financing and savings.

1. Down Payment Requirements

The down payment is a substantial upfront payment made when purchasing a home. Traditionally, a 20% down payment was standard, but contemporary lending practices offer more flexibility:

• Conventional Loans: These loans, not insured by the government, typically require a minimum down payment of 3% to 5%. However, a higher down payment can lead to better interest rates and may eliminate the need for private mortgage insurance (PMI).
• FHA Loans: Backed by the Federal Housing Administration, these loans are designed for low-to-moderate-income borrowers and require a minimum down payment of 3.5%. Borrowers with credit scores between 500 and 580 may qualify with a 10% down payment.
• VA and USDA Loans: These government-backed loans offer 0% down payment options for eligible veterans, active-duty service members, and rural homebuyers, respectively. VA loans are for military borrowers and USDA home loans are for people living in rural America. While they don’t require a down payment, other costs and eligibility criteria apply.

2. Closing Costs

Beyond the down payment, buyers must account for closing costs—fees associated with finalizing the mortgage. These typically range from 2% to 5% of the loan amount. For instance, on a $300,000 home, closing costs could be between $6,000 and $15,000.

3. Reserve Funds

Lenders often require borrowers to have reserve funds—additional savings that can cover mortgage payments for a specified period, typically two to six months. This financial cushion reassures lenders of the borrower’s ability to manage payments in unforeseen circumstances.

4. Additional Considerations

• Private Mortgage Insurance (PMI): If your down payment is less than 20% on a conventional loan, lenders usually require PMI, which protects them if you default on the loan. This adds to your monthly expenses until you build sufficient equity.
• Market Conditions: Economic factors, such as interest rates and housing market trends, influence the total savings needed. Staying informed about current market conditions can help in planning your home purchase. CBS News

5. Strategies to Accumulate Savings

• Automated Savings: Set up automatic transfers to a dedicated savings account to build your fund consistently.
• Budgeting: Analyze your expenses to identify areas where you can cut back and allocate more towards your home savings.
• Down Payment Assistance Programs: Explore local and state programs offering grants or loans to assist with down payments and closing costs. These programs can significantly reduce the amount you need to save.

6. The Bigger Picture

While accumulating savings is crucial, it’s equally important to maintain a healthy credit score, manage existing debts, and ensure a stable income. Lenders assess these factors to determine your loan eligibility and terms.

In conclusion, the amount of savings required for a home loan in 2025 varies based on loan type, home price, and individual financial circumstances. By understanding the components involved and planning diligently, you can navigate the path to homeownership with confidence.

Can I Afford a $500,000 House if I Earn $100,000 a Year?

Affording a $500,000 house on a $100,000 annual income depends on various factors, including your debt-to-income (DTI) ratio, credit score, down payment amount, and monthly expenses. A common rule of thumb, known as the 28/36 rule, suggests spending no more than 28% of your gross monthly income on housing expenses (mortgage, property taxes, insurance) and no more than 36% on total debt obligations, including car loans, student loans, and credit cards.

For a $100,000 salary, 28% of your gross monthly income would be approximately $2,333. If you put down 20% ($100,000) on a $500,000 home, the remaining $400,000 mortgage would translate to a monthly payment of roughly $2,200 at a 6% interest rate over 30 years. This fits within the 28% threshold, assuming minimal additional debt.

However, factors such as property taxes, homeowners insurance, and private mortgage insurance (PMI) for down payments under 20% can increase monthly costs. Lenders will also evaluate your DTI ratio; a lower ratio increases affordability. For instance, if your total monthly debt exceeds $800 (8% of gross income), your ability to afford a $500,000 house might be restricted.

Savings also play a critical role. You’ll need funds for closing costs (typically 2–5% of the home price) and reserves for emergencies. Additionally, a strong credit score can secure better interest rates, reducing your monthly payments.

While it’s possible to afford a $500,000 house with a $100,000 income, careful budgeting and financial planning are essential to ensure long-term affordability. Consulting with a trusted lender or a seasoned loan officer can provide personalized insights based on your financial situation.

Find Out How Much Savings Lenders Are Looking for When You Apply for a Mortgage or Home Loan.

A Higher Down Payment Means a Cheaper Mortgage

While you do not need to generally put down 20% for a home loan, remember that the more money you put down, the cheaper the mortgage for most people. With a conventional mortgage that is backed by Fannie Mae or Freddie Mac, there is a strong incentive to put down more than 3% or 5%. The more money you put down above these levels, the lower the rate, fees and the cost of mortgage insurance. If you put down 20% or more, you do not need to pay for mortgage insurance at all.

As home values have been rising in the last two or three years, many first-time home buyers are unable to put down 20% to buy a home. That is why there are many loan products out there that only have a 3% to 5% down payment requirement.

FHA and VA Loans

If you have a lower credit score and black marks on your credit report, such as a foreclosure or bankruptcy, you may find that you are paying a much higher rate for a conventional mortgage. And if you cannot put down more than 10%, your rate will be higher still. Home buyers in this situation may want to consider the FHA or VA loan (the latter is only for active military or military veterans. 100% financing is available with VA loans, which is one of the few 100% financing loans still on the market in 2018).

Government backed loans such as FHA and VA are guaranteed by the federal government. So, lenders are more likely to extend credit to people with lower credit scores and lower down payments. The FHA-insured loan is usually the best option for people with less than a 10% down payment and a credit score in the low 600’s or even lower. You can get approved for an FHA loan with a credit score as low as 580, and you only need a down payment of 3.5%. However, you will need to pay for mortgage insurance for the life of the loan with less than a 10% down payment. That is the price of getting FHA financing these days with a low-down payment. Once you have at least 20% equity in the property, it is recommended to refinance out of the FHA mortgage into a conventional loan. But you have to have the credit score to make it worthwhile, or you could pay a much higher rate.

Summary on Required Savings for Mortgage Approvals

If you want to buy a home, especially as a first-time buyer, and you do not have a lot of money for a down payment, getting a low-down payment mortgage is an option. You can often qualify for a home loan with a 3% or 5% down payment. In the case of a conventional loan, you will pay a higher rate with the lower down payment. It may be worth refinancing the loan once you have 20% equity, so you can get a lower rate.

If you have an FHA loan, you only need a 3.5% down payment, but you will probably pay for mortgage insurance for the entire life of the loan.

Buying a home with a low-down payment is definitely possible and even desirable for some people; to save a 20% down payment in some expensive markets could mean paying rent for many years. It may make sense to get a low-down payment loan with a higher rate and/or mortgage insurance than to pay rent for 8 more years as you try to save a big down payment.

Just bear in mind that as with everything, a low-down payment loan has downsides in terms of interest rate and mortgage insurance.

Share on Facebook

Tweet

Follow us