Building a Financial Safety Net Before You Close on Your First Home

Buying a home for the first time is a major financial milestone. For many, it’s one of the largest purchases they’ll ever make.

Between the down payment, closing costs, and moving expenses, it’s easy to focus on what you need to buy the home itself. However, it’s just as important to consider what happens after moving in.

Unexpected costs can arise quickly once you become a homeowner. That’s why building a financial safety net before closing is essential. Having a cash buffer for emergencies, maintenance, and unplanned expenses can help you stay secure and enjoy your new home with confidence.

Unlike renting, homeownership means you’re fully responsible for the property, including repairs, utility bills, and taxes. Even if you’ve budgeted carefully for your mortgage payment, the reality is that additional costs can pile up.

According to the Federal Reserve’s 2024 Survey of Household Economics and Decision making, nearly 37% of Americans would struggle to cover a $400 emergency expense with cash or savings. When you own a home, that number becomes more concerning. Unexpected issues, like a leaky roof or a broken appliance, can easily cost hundreds or thousands of dollars.

A well-built financial cushion protects you from dipping into high-interest credit cards or personal loans when life happens. It helps you handle short-term challenges, like a job change, medical bill, or home repair, without jeopardizing your ability to make mortgage payments.

The right amount for your financial safety net depends on your income, monthly expenses, and the condition of your home. Most financial experts generally recommend saving at least three to six months’ worth of living expenses before closing.

For first-time homeowners, it’s wise to expand that definition beyond your typical rent and utilities. Your new monthly expenses will include:

• Mortgage payment (principal, interest, taxes, and insurance)

• Home maintenance and repairs

• Higher utility costs, especially if you’re moving from an apartment to a single-family home

• HOA (homeowners association) dues or community fees (if applicable)

Once you’ve estimated your monthly costs, multiply that by three to six to get a baseline savings goal. For instance, if your total monthly housing and living expenses come to $3,000, your safety net should ideally total between $9,000 and $18,000.

That may sound like a lot, but remember, you don’t have to save it all at once. The goal is to steadily build reserves as you prepare for closing.

It’s easy to underestimate how many expenses come before and after closing. Some of these are one-time costs, but they can take a decent amount out of your savings if you’re unprepared.

Upfront costs to plan for

• Home inspection and appraisal fees: Typically range from $400 to $1,000 combined.

• Closing costs: Usually 2% to 5% of the purchase price and may include origination, title, and recording fees.

• Moving expenses: Whether you hire movers or rent a truck, costs can range from $500 to $2,500, depending on distance.

• Initial home setup: Think new locks, furniture, window coverings, or utility deposits.

It can be a good idea to keep a separate “home transition fund” to cover these costs. That way, you don’t dip into your long-term emergency savings immediately.

Even if you’re buying a move-in-ready home, surprises happen. A worn-out HVAC system or plumbing issue can arise within months of closing.

A good rule of thumb is to budget 1% to 2% of your home’s value per year for maintenance and repairs. For example, if your home costs $300,000, that means setting aside $3,000 to $6,000 annually, or roughly $250 to $500 per month, in a separate savings account.

If your home is older, or if you know major systems (like the roof or water heater) are nearing the end of their lifespan, plan to save more. Having these funds set aside allows you to act quickly when something needs attention.

Job changes or temporary income loss can make it difficult to keep up with mortgage payments. Before closing, consider how stable your employment situation is and whether your safety net could cover several months of payments if needed.

If you’re self-employed, seasonal, or work on commission, it may be especially important to build a larger emergency cushion closer to six months of expenses to protect against slower months or unexpected gaps in income.

Some homeowners also look into mortgage protection insurance, which can help cover payments in the event of disability or job loss. However, having personal savings gives you more control over how those funds are used.

If you’re preparing to buy your first home, here are a few ways to boost your savings without stalling your homeownership goals:

1. Automate your savings: Set up automatic transfers from your checking to a dedicated savings account each month. Treat it like a bill you pay yourself.

2. Reduce discretionary spending: Consider temporarily cutting back on subscriptions, dining out, or vacations. Redirect that money into your emergency fund.

3. Use windfalls wisely: Tax refunds, bonuses, or gifts can significantly accelerate your savings.

4. Pay off small debts: Reducing monthly obligations can free up cash flow for your savings and future homeownership costs.

5. Explore down payment assistance: Some state or local programs may help with upfront costs, allowing you to keep more savings in reserve.

Once you’ve built your emergency savings, it’s best to keep them in an account that’s safe, accessible, and earns some interest. Savings accounts or money market accounts can be effective options. They keep your funds liquid while providing a modest return.

Avoid investing your emergency fund in stocks or other volatile assets where the value can fluctuate. The goal isn’t growth. Instead, it’s reliable, quick cash.

Closing on your first home is a proud and exciting achievement. But real financial security comes from being prepared for what comes next.

By setting aside a safety net before closing, you’re saving for emergencies and building confidence in your ability to handle homeownership’s ups and downs. With a solid buffer in place, you can settle into your new home knowing that even if the unexpected happens, you’ll be ready for it.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.