Can a Down Payment Be Too Big?

Building up savings can feel good. It’s nice to know you are working toward and getting closer to your financial goals, especially when the goal is the biggest financial decision of your life — buying a home. When you are figuring out how much home you can afford, it’s important to look at both the upfront and ongoing costs. This means calculating your potential monthly mortgage in addition to considering how large of a down payment to make. But once you’ve saved up enough for that down payment, it doesn’t necessarily mean you should rush to sign the papers. Consider the following reasons using all your savings for a down payment can get you into trouble.

Magic Number

So exactly how much of your savings should you use toward a down payment if not all? First, it’s important to find out how much you can and want to spend for a home. Many experts advise not spending more than one-third of your monthly income on housing costs, but this may vary depending on your circumstances and where you are looking to buy.

Once you figure out the home’s cost, you can determine the “expected” down payment amount as it is typically 20% of the home’s selling price for a conventional loan. (There are other options that require lower down payments.) This is probably a large chunk of your savings, and that’s OK. But it’s a good idea to leave money aside for the other costs of having a home and future financial goals.

Additional Costs

The down payment is not all you will owe in upfront costs. There are also closing costs, moving costs and the general expenses of buying and moving into a new home. Perhaps you will be buying additional furniture or making some improvements.

Also, while you may not have to pay rent once you own a house, but there are still mortgage payments, taxes, insurance and utilities to consider. Beyond that, owning a home means taking responsibility for the care and maintenance of it, which can be costly. There is no more landlord to cover repairs. Your savings will need to cover all of these expenses in additional to the down payment amount.

Savings Cushion

Even those aren’t even all the expenses you need to consider. You have probably heard that it’s a good idea to have an emergency fund in case something was to happen (think major car repair, trip to the emergency room or job loss). Even though saving for a house is a major life goal, it’s important not to leave yourself short on cash. Experts generally recommend having between three and nine months’ worth of living costs set aside. Exactly how much you need to have socked away will depend on your personal circumstances — how secure your job is, how many people in the family earn income, etc.

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The exact amount you put toward a down payment for your home is up to you and your lender, but it’s a good idea to make sure it’s not all of your savings. It’s important to calculate both the immediate and long-term costs of any houses you are considering buying and find one you can comfortably afford. If you don’t feel quite ready to buy the property you have in mind, you can analyze if continuing to rent is a better move so you can keep building your savings. Keep in mind that a better credit score can help you make your dream home more budget-friendly (lower interest rates = lower monthly payment). You can check your credit scores for free on Credit.com to see where you stand.