The down payment is the part everyone plans for. Closing costs, earnest money, reserves and the first month of ownership are the parts that catch people out.
The 20% down payment is not a requirement
It is a threshold, and confusing the two keeps people renting for years longer than necessary.
Plenty of conventional loans allow 3–5% down. Government-backed programmes go lower, and some go to zero for buyers who qualify. What 20% buys you is the removal of private mortgage insurance and usually a slightly better rate — not permission to buy.
The real question is a trade-off, not a rule: waiting four more years to save the full 20% while rents and prices move is not automatically cheaper than buying sooner and paying PMI until you reach 80% loan-to-value. Run both versions with real numbers before assuming.
Closing costs are the expense nobody budgets for
Typically 2–5% of the purchase price, due at closing, and separate from your down payment. On a 350,000 home that is roughly 7,000 to 17,500 in cash beyond the deposit.
What is in there: lender origination and underwriting fees, appraisal, title search and title insurance, recording fees, prepaid property tax and homeowners insurance, and the initial escrow deposit. Some are negotiable, some are not, and in some markets sellers contribute — but you cannot plan on that.
The cash you need before that
- Earnest money — a deposit with your offer, often 1–3%, showing you are serious. It usually applies to your purchase, but you can lose it if you walk away outside your contingencies.
- Inspection — a few hundred dollars, paid whether or not you end up buying the house. Skipping it to save that money is how people inherit a five-figure problem.
- Appraisal — often paid up front, and sometimes required again if you change lenders.
- Reserves — many lenders want to see you still have several months of housing payments in the bank after closing. Emptying your accounts to reach the down payment can cost you the approval.
Financing furniture, buying a car, even applying for a store card can change your debt-to-income ratio enough to sink the loan. Lenders re-check shortly before completion, and people have lost houses to a sofa. Change nothing about your credit or your job until the keys are in your hand.
The costs that start the day you move in
Owning is not renting with a different payment. Budget for:
- Maintenance — a common planning figure is around 1% of the home's value a year. It does not arrive evenly; it arrives as a roof.
- Property tax and insurance that rise — your mortgage principal and interest are fixed, but these are not, which is why an escrowed payment goes up over time.
- Immediate spending — the appliances that do not convey, the room that has to be painted, a lawnmower, tools, curtains. It adds up faster than anyone expects.
- Higher utilities if you are moving from an apartment to a house.
How much house, honestly
Lenders decide using your debt-to-income ratio, and common guidance keeps housing under 28% of gross income and all debt under 36%. Being approved for a number is not the same as that number being wise — the bank is underwriting the loan, not your childcare bill or your appetite for risk.
A blunter test: work out the full monthly payment including tax, insurance and PMI, subtract your current rent, and save that difference every month for six months. If it is comfortable, you can afford the house. If it is not, you have learned that before signing rather than after.
Two things to do early
Get pre-approved, not pre-qualified. Pre-qualification is an estimate from information you volunteered. Pre-approval involves verified documents and carries weight with sellers.
Pull your credit reports months ahead. Errors are common and take time to correct, and the gap between a fair and a very good score is worth real money over thirty years. See how the score is calculated.
This is educational content, not personalised advice, and programmes and requirements vary by lender, state and loan type.