The real number depends on your down payment, your local market, and what you can afford to borrow

There is no single answer, because house prices vary wildly by location and your ability to borrow depends on your income and credit. But the math works like this: you need enough cash for a down payment (typically 3 to 20 percent of the purchase price), closing costs (usually 2 to 5 percent of the purchase price), and a cash cushion after you close. A lender will also require you to have a certain income relative to your monthly payment—this is called your debt-to-income ratio, and it typically cannot exceed 43 percent of your gross monthly income.

The most useful way to think about it is backwards: figure out what monthly payment you can actually afford, then work out what price house that supports, then calculate the down payment and closing costs on that price. This keeps you from saving toward a number that doesn't match what you can actually borrow.

Key Takeaways

  • Your down payment is usually 3 to 20 percent of the purchase price, but the lower your down payment, the higher your monthly payment and the more you pay in interest over time.
  • Closing costs—the fees lenders, inspectors, and title companies charge—typically run 2 to 5 percent of the purchase price and must be paid in cash at closing.
  • Lenders will not lend you more than 43 percent of your gross monthly income (before taxes) as a monthly payment, so your income sets a ceiling on what you can borrow regardless of how much you save.
  • After closing, you should keep 3 to 6 months of mortgage, property tax, insurance, and maintenance costs in savings, because a house will need repairs you cannot predict.
  • The down payment size matters more than you might think: a 20 percent down payment eliminates private mortgage insurance, which adds $100 to $300 per month to a typical payment.

How to work backwards from what you can afford monthly

Start with your gross monthly income—the number before taxes and deductions. Multiply it by 0.43. That is the maximum monthly payment a lender will allow you to make toward your mortgage, property taxes, homeowners insurance, and any other debts (car loans, student loans, credit cards). If you earn $5,000 a month gross, your maximum payment is $2,150.

Next, subtract what you already owe each month. If you have a $400 car payment and $200 in student loans, you have $1,550 left for a mortgage payment. A mortgage calculator (available free from most lenders' websites) will tell you what loan amount that payment supports at current interest rates. If rates are 7 percent and you want a 30-year loan, a $1,550 payment supports roughly a $220,000 loan.

Now add your down payment to that loan amount to find the house price you can afford. If you have $50,000 saved and want to put down 20 percent, you can afford a $250,000 house ($50,000 down plus $200,000 borrowed). If you only have $20,000 and put down 8 percent, you can afford a $217,000 house ($20,000 down plus $197,000 borrowed)—but your monthly payment will be higher because you borrowed more, and you will pay private mortgage insurance.

Down payment: why the percentage matters more than the dollar amount

The down payment is the cash you hand over at closing. It reduces the amount you need to borrow, which reduces your monthly payment. But the size of your down payment also determines whether you pay private mortgage insurance (PMI)—an extra monthly fee that protects the lender if you stop paying.

If you put down less than 20 percent, you pay PMI. The cost varies by lender and loan amount, but typically runs $100 to $300 per month on a $200,000 loan. If you put down 20 percent or more, PMI disappears. This means a 15 percent down payment is often more expensive over time than a 10 percent down payment, because the monthly payment is higher and you still pay PMI.

The tradeoff is that saving 20 percent takes longer. A 3 percent down payment (available through some first-time buyer programs) lets you buy sooner but costs more each month. A 10 percent down payment is a middle ground: you avoid the lowest-down-payment programs' stricter requirements, but you save faster than waiting for 20 percent.

Closing costs: the cash you need on top of your down payment

Closing costs are the fees charged by the lender, the title company, the appraiser, the inspector, and the local government. They typically total 2 to 5 percent of the purchase price. On a $250,000 house, that is $5,000 to $12,500—all due in cash at closing, separate from your down payment.

Some of these costs are negotiable. The lender's origination fee, the title company's fee, and the real estate agent's commission (if you use one) can sometimes be discussed. Others—like the appraisal fee, the inspection fee, and local recording fees—are mostly fixed. Ask the lender for a Loan Estimate within three days of applying; it will list every closing cost and tell you exactly what to expect.

Some buyers ask the seller to cover part of the closing costs as part of the purchase negotiation. This is common and legal, though it reduces the seller's incentive to accept your offer. If the seller agrees to pay $5,000 of your closing costs, you need $5,000 less in savings.

The cash cushion you need after you close

Once you own the house, you are responsible for every repair. The roof, the furnace, the plumbing, the foundation—if it breaks, you pay. Most financial advisors recommend keeping 3 to 6 months of your total monthly housing costs in savings after closing. This includes your mortgage payment, property taxes, homeowners insurance, and an estimate for maintenance.

If your monthly payment is $1,500, your property taxes are $300, your insurance is $150, and you budget $200 for maintenance, your total is $2,150. A 6-month cushion would be $12,900. This sounds like a lot, but a water heater costs $1,500 to $2,500, a roof can cost $10,000 to $20,000, and a furnace replacement runs $4,000 to $8,000. A cushion keeps you from taking on new debt when something breaks.

How your credit score affects how much you can borrow

Lenders use your credit score to decide what interest rate to offer you. A higher score gets a lower rate, which means a lower monthly payment on the same loan amount. The difference is significant: on a $200,000 loan, a 6.5 percent rate costs about $1,264 per month, while a 7.5 percent rate costs about $1,398. That is $134 more per month, or $48,240 more over 30 years.

Most lenders require a credit score of at least 620 to lend at all, and 640 to 660 to avoid the highest rates. If your score is below 620, you may not be able to borrow through a conventional loan. Some first-time buyer programs accept lower scores, but they charge higher rates and require larger down payments to offset the risk.

If your score is low, spending 6 to 12 months paying down debt and making on-time payments before you apply for a mortgage can save you thousands. A 50-point improvement in your score can lower your rate by 0.25 to 0.5 percent, which translates to $50 to $100 per month in savings.

Regional differences: what you need in an expensive market versus an affordable one

A house in rural Kansas might cost $150,000; the same house in suburban San Francisco might cost $1.2 million. Your savings target scales with your local market. In an affordable market, you might save $40,000 for a 20 percent down payment plus closing costs. In an expensive market, you might need $200,000 or more.

This is why the percentage approach (down payment as a percent of price, closing costs as a percent of price) is more useful than a fixed dollar target. It works whether you are buying a $150,000 house or a $500,000 house. The real constraint is your income and what lenders will let you borrow relative to that income.

Frequently Asked Questions

Can I buy a house with less than 3 percent down?

Yes, some first-time buyer programs offer 0 percent down, though they typically require a lower credit score, charge higher interest rates, and have stricter income limits. The U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) both offer zero-down loans to people who meet their requirements. Conventional loans rarely go below 3 percent down.

What if I have the down payment but not enough for closing costs?

Ask the seller to cover closing costs as part of your offer—this is a normal negotiation point. You can also ask the lender whether they will roll closing costs into the loan amount, though this increases your monthly payment and the total interest you pay. Some first-time buyer programs allow this; others do not.

Should I save 20 percent down or buy sooner with less?

This depends on whether house prices and rents are rising in your area and how long it would take you to save 20 percent. If you will rent for five more years while saving, and rents are rising faster than you can save, buying sooner with 10 percent down and paying PMI might cost less overall. If you can save 20 percent in two years and prices are stable, waiting is cheaper.

Does my partner's income count toward what I can borrow?

Yes, if you apply for the loan together. Both of your incomes count, and both of your debts count. If one of you has significant debt or a low credit score, it may lower the total you can borrow. Some couples apply separately to avoid this, though this requires each person to may have access to on their own income.

What happens if I lose my job after I buy?

You are still responsible for the mortgage payment. This is why the cash cushion matters—it gives you time to find work before you fall behind. If you cannot make payments, the lender can foreclose and take the house. This is why lenders care about your income at the time you apply, not your job security.