Does Medical Debt Impact Your Credit Score? And How Much Do You Really Need To Save for a Home

Summary

NerdWallet's Smart Money Podcast Episode: Does Medical Debt Impact Your Credit Score? And How Much Do You Really Need To Save for a Home Release Date: July 31, 2025

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Introduction

In this insightful episode of NerdWallet's Smart Money Podcast, hosts Sean Files, CFP®, and Elizabeth Ayoola delve into two pressing financial topics: the impact of medical debt on credit scores and strategies for saving a down payment for a home. Joined by expert guest Kate Wood and former CFPB Director Rohit Chopra, the discussion offers listeners comprehensive guidance to navigate these complex financial landscapes.

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Segment 1: Medical Debt and Its Impact on Credit Scores

Overview of Medical Debt Issues

The episode begins with a discussion on the pervasive issue of medical debt and its detrimental effects on individuals' credit scores. Elizabeth and Sean introduce the topic, highlighting how unexpected medical expenses can lead to significant debt, especially for those without adequate insurance coverage.

Interview with Rohit Chopra (02:45 - 13:10)

Rohit Chopra, former director of the Consumer Financial Protection Bureau (CFPB), provides an in-depth analysis of recent policy changes and their implications for consumers:

• CFPB's Medical Debt Ban:

  • Chopra explains the CFPB's initiative to remove medical debt under $500 from credit reports, aiming to prevent unjust penalties on credit scores for medical expenses. He states, “We do not want credit reports to be used as a vehicle to coerce people into paying bills they don't owe” (03:05).

• Judicial Reversal:

  • Despite the CFPB's efforts, a federal judge overruled the rule, citing it exceeded the agency's authority. Chopra remarks, “The rule was very much grounded in exactly what the law allows” (06:11), emphasizing the ongoing challenges faced by the CFPB amidst political and legal pressures.

• State of the CFPB:

  • Chopra paints a concerning picture of the CFPB's current state, describing it as “in a coma” (08:26) due to significant funding cuts and operational restrictions. He warns that this stagnation hampers the agency's ability to protect consumers from financial abuses.

• Future Implications for Consumers:

  • With the reversal of the medical debt ban, Chopra advises consumers to remain vigilant. “Everyone should be checking their credit report regularly” (12:05) and utilizing resources like state insurance commissioners to resolve disputes.

Conclusion of Segment: Chopra underscores the importance of regulatory bodies in safeguarding consumer rights and the adverse effects their weakening can have on financial well-being. Listeners are encouraged to proactively manage their credit and seek assistance when dealing with medical debts.

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Segment 2: Saving for a Down Payment on a Home

Listener's Financial Situation and Goals

A listener emails inquiring about the best strategies to save for a down payment after paying off student loans, car loans, and credit card debt. They have $500 in emergency savings and aim to save aggressively for a home within the next eight months.

Expert Advice with Kate Wood (16:33 - 35:37)

Kate Wood, a housing authority expert, joins the discussion to provide actionable advice:

• Emergency Fund Importance (17:11 - 18:26):

  • Kate emphasizes the necessity of expanding the emergency fund. “$500 will get you out of most binds… but it still makes me a little bit nervous because I'm willing to bet that $500 is not enough to cover even one month's worth of necessary expenses” (17:11).
  • Both hosts agree on the importance of a robust emergency fund to prevent tapping into down payment savings during unforeseen emergencies.

• Savings Vehicles: High Yield Savings Accounts vs. CDs (19:37 - 24:52):

  • High Yield Savings Accounts (HYSAs):

    • Sean advocates for HYSAs, highlighting their liquidity and higher interest rates compared to traditional savings accounts. “High Yield Savings Accounts are a really great place to park your cash” (22:08).
    • Elizabeth points out current HYSA rates can be as high as 4.66%, significantly outperforming the national average traditional savings rate of 0.38% (21:08).

  • Certificates of Deposit (CDs):

    • Sean discusses CDs as an alternative, noting their comparable yields but less flexibility. “With CDs your money is generally tied up for a set term” (22:56).
    • For short-term goals, he suggests a 3 to 6-month CD could offer slightly higher returns, though it requires careful timing to avoid penalties for early withdrawal (24:10).

  • Verdict:

    • Elizabeth summarizes, “It depends. Whatever gives them the highest return, given their time constraints, is probably your best bet” (24:26), advising listeners to evaluate based on their specific timelines and flexibility needs.

• Additional Home-Buying Expenses (25:12 - 33:19):

  • Closing Costs:

    • Kate breaks down closing costs, explaining they typically range from 2% to 6% of the loan amount. She provides a detailed example, illustrating how these costs can significantly add to the down payment requirement (29:06).
    • Elizabeth and Sean emphasize the importance of budgeting for these costs to avoid financial strain.

  • Home Maintenance and Emergency Funds:

    • Importance of setting aside funds for home maintenance, recommended at 1% of the home's value annually. This ensures homeowners are prepared for both routine and unexpected repairs (30:45).

  • Down Payment Assistance Programs:

    • Kate highlights the availability of down payment assistance programs, which can provide low-interest loans or grants to eligible buyers. “These exist everywhere in the United States and they're generally fairly underutilized” (35:25).

Conclusion of Segment: The discussion reinforces the multifaceted approach required for saving a down payment—balancing between maximizing returns through HYSAs or CDs, expanding emergency funds, and accounting for additional home-buying expenses. Utilizing available assistance programs can also alleviate the financial burden.

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Key Takeaways

1. Medical Debt Management:

   • Medical debt can severely impact credit scores, but recent regulatory setbacks hinder protections. Regularly monitor credit reports and proactively address disputed debts.

2. Saving for a Home:

   • Prioritize building a comprehensive emergency fund alongside saving for a down payment.
   • Utilize High Yield Savings Accounts for better returns and liquidity, or consider CDs if the savings goal aligns with the fixed terms.
   • Account for additional costs such as closing fees and home maintenance when budgeting.
   • Explore down payment assistance programs to ease the financial load.

3. Holistic Financial Planning:

   • Effective financial management involves balancing immediate savings goals with long-term financial security.
   • Leveraging expert advice and available resources can optimize your financial strategy for significant milestones like homeownership.

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Notable Quotes

• Rohit Chopra on CFPB's Intentions:

  “We do not want credit reports to be used as a vehicle to coerce people into paying bills they don't owe.” (03:05)

• Chopra on the State of the CFPB:

  “The CFPB is in a coma… it is going to be harder to really make sure that the price you're seeing or the interest rate you're seeing is accurate and being placed on that bill properly.” (08:26)

• Kate Wood on Savings Strategy:

  “High Yield Savings Accounts are a really great place to park your cash.” (22:08)

• Sean Files on Financial Prudence:

  “Whatever gives them the highest return, given their time constraints, is probably your best bet.” (24:26)

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Conclusion

This episode of NerdWallet's Smart Money Podcast provides invaluable insights into managing medical debt and strategically saving for a home. By understanding the current regulatory landscape and employing effective savings strategies, listeners are better equipped to make informed financial decisions that align with their long-term goals.

For more personalized advice, listeners are encouraged to submit their financial questions via voicemail or text at 901-730-6373.

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Disclaimer: The information presented in this summary is for general educational and entertainment purposes only and may not apply to individual circumstances. Always consult with a qualified financial advisor for personalized advice.

Transcript

[Sean Files]

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[Elizabeth Ayola]

And I'm Elizabeth Ayola. Later this episode, we'll be learning about how to save for a down payment on a house. But first up, our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Our news colleague Ana Helhosky is with us to talk about a true boogeyman in the financial world. Dum, dum, dum. Medical debt.

[Ana Helhosky]

Yeah, Elizabeth and Sean, this is everyone's worst nightmare, right? You either don't have insurance or don't have enough insurance, or something happens and you end up owing for your medical care. And sometimes that's really large sums.

[Sean Files]

And historically, that debt has gone on your credit reports and can do real damage to your credit scores.

[Kate Wood]

Exactly.

[Ana Helhosky]

Well, earlier this year, the Consumer Financial Protection Bureau, the cfpb, created a rule that was expected to remove medical debt that was under $500 from credit reports. It also would have prohibited lenders from using medical information as part of their loan considerations. But earlier this month, a federal judge told the CFPB that the rule exceeded its authority. It's the latest hit to the agency, which the Trump administration has worked steadily to dismantle this year. We have Rohit Chopra, former director of the cfpb, here to talk more about what the rule reversal means for Americans and what the state of the CFPB is today. Rohit, welcome to Smart Money.

[Rohit Chopra]

Thanks for having me.

[Ana Helhosky]

Well, you spearheaded the rule banning medical debt from credit reports, which was issued in January, but has now been overturned. So, first off, I'm hoping you can talk about the agency's reasons for the ban in the first place.

[Rohit Chopra]

One of the things that is really important to remember is that we do not want credit reports to be used as a vehicle to coerce people into paying bills they don't owe. A credit report was really put together decades ago in order to help a lender determine whether someone has actually taken out a bunch of other loans or whether they actually have the ability to pay it back. But we've seen all sorts of abuses in how debt can be parked on credit reports. Sometimes that debt isn't owed at all, but debt collectors can use the threat of putting it on a credit report harming your credit score in order to get you to pay. And Based on the CFPB's analysis, we found that medical bills that were parked on credit reports, even if they were valid, were unfairly penalizing people on their credit score. And the data really showed this. It was not really predictive of your ability to pay an auto loan or a mortgage or a credit card. And so rather than going through an extremely complex and cumbersome rule, we proposed implementing a longstanding congressional prohibition that protects people's medical information on credit reports. And we proposed and finalized banning this practice.

[Ana Helhosky]

So what could the medical debt ban have done for Americans?

[Rohit Chopra]

Well, a few things. I think we've all really been in that doom loop where let's say you go to the emergency room, there may be a facility charge, there may be a provider charge, there may be an ambulance charge, and often it may be subject to one deductible or one copay. It's all complex and confusing, but often people with insurance are saying, this is supposed to be covered. And the provider or the facility and the insurance company go round and round and round. And at a certain point, sometimes it just plops on your credit report. We don't want people to have to feel like they are one day going to be subject to their credit score being dinged, which jacks up the price for other types of loans. It really affects interest rate or whether or not you're going to be approved or denied. And the CFPB projected that it would actually help a substantial number of people over the course of the rules implementation to qualify for more mortgages and to get more affordable rates.

[Ana Helhosky]

Now, the big three credit reporting agencies, that's Equifax, Experian and TransUnion, had challenged the rules. So what was their position?

[Rohit Chopra]

After we published a lot of our research, the big three credit reporting conglomerates actually voluntarily announced shortly after that they were going to remove Most bills below $500, and that was going to wipe out a major piece of it. They didn't actually sue the CFPB themselves. They hired a group, a kind of lobbying organization that represents also other parts of this medical credit reporting ecosystem, and they sued. The rule was very much grounded in exactly what the law allows. The CFPB is permitted to, to analyze and restrict certain types of information, especially when it may be inaccurate. But I think we have seen how the new cfpb, which honestly is not even doing any work other than vacating a lot of the key consumer protections and law enforcement actions that are taking place now.

[Ana Helhosky]

I'm curious, were you surprised by the federal judge's ruling, or is it something you kind of saw coming?

[Rohit Chopra]

I didn't see it totally coming in the sense that it was a very legally sound one. But once the dismantling of the CFPB started, this is not the only rule that they've gone to court to actually agree with lobbyists and other companies to just delete the rules on the book. In fact, the new CFPB has actually just deleted all sorts of, of guidance, documents, policies, and others. I think with the fundamental goal as, as Elon Musk stated, to delete the.

[Ana Helhosky]

CFPB and to just provide listeners with a little bit of context. In the time since President Trump removed you from your position, his administration has taken a series of actions to destabilize the agency, including trying to fire nearly the entire staff, halting operations, dropping lawsuits against financial services companies, and the big beautiful bill called for deep further funding cuts. So from your perspective, what's the status of the CFPB's operations today and what are the consequences for consumer protections?

[Rohit Chopra]

Yeah, right now the CFPB is in a coma. It is not really doing anything. And if it is, it's doing things to really help those who have broken the law or already have a lot of power. And here's what I think is the big implications for consumers more broadly. Number one, it is going to be harder to really make sure that the price you're seeing or the interest rate you're seeing is accurate and being placed on that bill properly. We took action against a lot of companies who were reporting false information on credit reports about auto loans, including saying that maybe you weren't paying, maybe your car was even repossessed, but you were in a payment plan. That law enforcement work deters a lot of that bad stuff. Or take a. Take something you wouldn't even notice. Maybe a credit card company. Maybe you go in on a trip and you charge something in a different currency. What if they were manipulating the exchange rate over hundreds of thousands of customers? I think that those are the little things that will just make it more costly for consumers. But then there's the bigger picture question. One of the reasons the CFPB was set up was in response to a massive mortgage crisis. And there was serious abuses on subprime mortgages, and it led to a meltdown of the global economy. The CFPB's work really does help make sure that those consumer abuses don't turn into a macroeconomic calamity.

[Ana Helhosky]

Now, one of the roles of the CFPB is to collect complaints from consumers. Nearly 9 million have been processed since the CFPB was launched in 2011, and some $21 billion were returned to consumers found to be wrong by financial institutions. Now, the CFPB's website shows that it is still accepting complaints. So far this year, more than 2.8 million complaints have been received. My question is, how can an agency that now still has so few resources able to handle the volume that it once did? And what can consumers expect to happen to those complaints that they submit?

[Rohit Chopra]

I actually think the CFPB complaint system is one of the best systems in all of government, and here's why. You know, often when you file a complaint with a government agency, it goes into some inbox or maybe even like a digital black hole. Consumers won't know if it's even being read. Our system was different. That complaint was sent directly to the financial company, and they were ordered to respond. So without the agency even really picking up a pen every day, people were getting errors corrected on their credit reports. They were getting refunds on fake or false fees. They were even sometimes able to avoid foreclosure or auto repossession. I hope people don't just stop filing them and giving up, because we still need them to raise their hand. State attorneys general, state bank regulators also have access to this data. And there's even a public database that helps people see what is going on. And that is a critical, critical component and really was the central node of everything we did.

[Ana Helhosky]

I want to ask one last question about the court ruling. Where does it leave Americans who have or might accrue medical debt in the future?

[Rohit Chopra]

They've got to be on guard. I think this is, there's no good answer to this. Everyone should be checking their credit report regularly. You are entitled to one free credit report per credit reporting conglomerate. And go to annualcreditreport.com you should look at the resources about what to do when facing medical debt that you may not owe or that should have been covered by insurance. You should also, if you're struggling to get an insurance claim resolved, go to your state insurance commissioner's website. They will have ways in which you can try to really get that claim resolved so that it doesn't fall on you financially. So I really offer a lot of empathy for everyone having to deal with it because people should be able to focus on getting better, not focus on all this paperwork.

[Ana Helhosky]

All right, Rohit Chopra, thank you for joining us today. Appreciate it.

[Rohit Chopra]

Thanks so much, Ana.

[Elizabeth Ayola]

And thank you, Ana. Up next, we answer a listener's question about how to save for a down payment for a house. But before we get into that, a reminder to send us your money questions. Do you want to know the smartest way to budget for the holidays? Or are you in the market for a new credit card but not sure how to find one that's best for you? Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's 9017-30-Nerd. You can also pop us an [e-mail] in a moment.

[Sean Files]

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[Elizabeth Ayola]

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[Sean Files]

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[Elizabeth Ayola]

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[Sean Files]

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[Elizabeth Ayola]

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[Sean Files]

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[Kate Wood]

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[Sean Files]

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[Kate Wood]

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[Kate Wood]

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[Sean Files]

We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from a listener's email. Here it is. Hi nerds. My husband and I finally moved to our dream area and are renting. We just finished paying all student loans, car loan and credit card debt, so we are now focusing on aggressively saving toward a down payment on our first house. We do have about $500 at a time in savings for any emergencies, but are ultimately dragging anything we can into our high yield savings for this down payment as CD rates seem close to the same rates and we want to be liquid when the time comes to pounce on a place we will likely be saving for another eight months, at least until the time is right. Not sure if we are doing the right thing or if we should be considering other savings accounts or items to consider before this next step. Thanks.

[Elizabeth Ayola]

Now to help us answer this listener's question on this episode of the podcast, we are joined by Kate Wood, an authority on housing and not a stranger to the podcast. Hey Kate.

[Kate Wood]

Hey, thanks for having me.

[Elizabeth Ayola]

So it sounds like the listener is in a great spot all around. They've paid down debt, are living in Their dream neighborhood. And now they want to save aggressively for a house. The bulk of their question is around the right savings vehicle for a down payment. But before we get into that, the listener said they have around $500 socked away for emergencies. Good job, listener. It's usually recommended people have three to six months of expenses saved, depending on whether it's a one or two income household.

[Kate Wood]

Okay, another, before we get into that, can we just dig into this a little bit more? What should your financial priorities be before you're saving for a down payment? Buying a house?

[Sean Files]

Well, in an ideal world, you'd have that three to six month emergency fund saved before you make a down payment on a house. And it'd be great if folks could save their down payment while they're building up their emergency fund. Our listeners said that they have around $500 in an emergency fund. And the truth is that $500 will get you out of most binds if something that's generally the amount that we've seen help people avoid going into credit card debt. But it still makes me a little bit nervous because I'm willing to bet that $500 is not enough to cover even one month's worth of necessary expenses, let alone three or six. So if I were this listener, I would be working on beefing up that emergency savings as I'm increasing my down payment fund with a realization that it means it might take longer to get to where I need to be with that down payment fund.

[Elizabeth Ayola]

I'm with you, Sean. And I know when I'm saving towards a goal. Sometimes that latter part that you said can make me maybe not save as much in the emergency fund. Cause I just want to get there quick. But I do imagine that if the listener doesn't have a robust enough emergency fund, what could happen is they end up tapping into the savings for the deposit when an emergency comes up and it's kind of counterproductive. Right?

[Kate Wood]

That definitely could happen. What about their whole financial picture? So what about debt? They mentioned that they've paid off debts, but how important is it to work on paying off your credit cards or student loans before you're putting a down payment on a house?

[Sean Files]

Our listener is in a pretty great spot. As I mentioned when I read their question, they've paid off a bunch of their debt. But you don't have to be totally debt free when you're getting ready to buy a house and putting a down payment out there. So in an ideal world, we'd all have enough money to build up our emergency savings. And our down payment funds and have no credit card debt. But for many folks, that's just not the reality. You can certainly buy a house with credit card debt. That's quite common, actually. But you may want to talk with your lender or broker to see how much debt they would find acceptable. And of course, if you have a lot of debt, that can lower your credit score, which might mean that you get less favorable terms on your loan. So, all good things to consider. But again, the good news for our listener at least is that they've paid off their debt. So great job.

[Elizabeth Ayola]

Let's get into the meat of the question now. Since it's a short term goal for the listener. They said they want to do it hopefully within the next eight months. They want their cash to be liquid and easily accessible. You're a homeowner, Kate. So tell us, where did you save your down payment?

[Kate Wood]

Well, this is really embarrassing, but let's remember that I didn't always work at NerdWallet. I'm a nerd now. I wasn't always a nerd, and so I pretty much saved it in my checking account. Before I was a nerd, I had a very fuzzy idea of what a high yield savings account was. I probably thought it had to do with investing and CDs, just like, that's an outdated music format, so speak for yourself, Kate.

[Sean Files]

I still love my CD player in my car. I listen to CDs all the time. Not outdated to me.

[Kate Wood]

Well, regardless, certificate of deposit was very foreign to me. And so, yeah, I mean, I think in my mind I thought I was doing it right because I was saving the money. And I was like, this is amazing. I'm doing it incredibly. But I really wasn't doing myself any favors with that strategy.

[Sean Files]

Yeah, I mean, hey, at least it wasn't just stuffed under your mattress or in a shoebox or something. So you were able to save. And that's kind of what matters at the end of the day, even though you didn't get a great yield on it.

[Kate Wood]

So trade off. No, I got no yield. I got no yield on it. So that was really not so much a step up from under the mattress as a step sideways from under the mattress. But Sean, I feel like you probably did this in a better way. Like, how did you save up your down payment?

[Sean Files]

Well, I had the fortune of being being a nerd by the time I was saving for a down payment on my house. So I kept my money for my down payment and my closing costs in a high yield savings account. And Naturally, I had an account designated for this purpose so that I wouldn't touch it and could focus on building up this very specific nest egg without being tempted to tap into it when some other expense popped up.

[Elizabeth Ayola]

I wouldn't expect anything less from you, Sean. Of course, I personally am not a homeowner, but I do know something about High Yield Savings Accounts or HYSAs. They definitely check the boxes of being liquid and easily accessible, which the listener wants. But High Yield Savings Accounts can be a smart place to save for a down payment, as Sean did, because they offer interest and more than you'd get with a checking account or traditional savings account, which our dear nerd Kate saved in no shade at all. Kate although although interest rates have gradually dropped in recent years, some accounts are still offering as high as 4.4.66% as of today. And High Yield Savings Account rates will tend to be higher than the national average for traditional savings accounts, which is currently around 0.38%. Now if you would like to see the most current list of High Yield Savings accounts with the best rates, check the link in today's episode description or you can just search online for NerdWallet best high yield Savings Accounts in whatever search engine you use.

[Sean Files]

Yeah Elizabeth, as you laid out, High Yield Savings Accounts are a really great place to park your cash. They're generally FDIC insured and and even though they are liquid and barely accessible, the cash in these accounts is often a little bit less available than the money you'd have in your checking account. And I think that can create some nice and useful friction to help you avoid spending that money that you have allocated to this purpose.

[Kate Wood]

It would have been really helpful in retrospect to know all this because I had thousands in my normal checking account earning zero interest, right? And this is such a thing for us. High Yield Savings Account, you could be getting passive income and instead I was like working for every dollar of that down payment. It was very Active Inc.

[Elizabeth Ayola]

So Sean, would you like to chime in about whether CDs are a good place to park a down payment? Which the listener wanted to know is it a better option than a High Yield Savings Account?

[Sean Files]

Yeah, I do like that our listeners considering certificates of deposits because they're right that the yields can be pretty similar to High Yield Savings Accounts. But whether it's better for you can depend on your timeline, the potential yield that you might get, and a need for flexibility. So with CDs your money is generally tied up for a set term and you can't take it out before that term is up without risking the yield that you get on that account. CD terms vary, but the most commonly available options range from three months to five years. For this listener, the best option might be maybe a 3 to 6 month CD since they want to purchase their home within the next eight months or so. As of the date of this recording, NerdWallet found that six month CDs are offering as high as 4.45% APY. Meanwhile, the yield on my savings account is earning me about 3.8% APY right now. So the CD is a little bit better. But again, you have that restriction of accessibility and timeline. If you're going to go the CD route, you'll want to make sure that you're timing things just right because if you end up closing in the house earlier than expected, you might have to forfeit some of the yield on that CD if you do pull the money from the account before its maturity, which it seems like our listeners are already aware of and a little concerned about.

[Elizabeth Ayola]

From what I'm gathering. Sean, it sounds like you're saying maybe CDs are a better option for people with more time to save.

[Sean Files]

Yeah. Listeners who may have longer time horizons could Explore longer term CDs as an option for saving money. Folks could also consider a CD ladder, which is when you invest in multiple CDs with different maturity dates if you have enough time on your hands.

[Elizabeth Ayola]

So what is the verdict then, Sean? High Yield Savings Account or cd?

[Sean Files]

For the listener, the answer is a classic. It depends. Whatever gives them the highest return, given their time constraints, is probably your best bet. But they're both safe options. Using a CD calculator and a compound interest calculator can help you compare potential returns of each option. And if you're likely to end up dipping in your pot of money, maybe a High Yield Savings account is better since you again might be penalized if you take your money out of the CD before it matures.

[Elizabeth Ayola]

Now that we are done nerding out on CDs and high yield Savings accounts, let's get back to the housing stuff. Kate, we're going to need your expertise here.

[Kate Wood]

I am so excited to finally flex it.

[Elizabeth Ayola]

All right, well, sometimes people can be so focused on saving for a down payment that they forget other expenses that come with a home. What are some other things people should be saving for outside of a down payment?

[Kate Wood]

Kate?

[Elizabeth Ayola]

I'm thinking about closing costs, for instance.

[Kate Wood]

Closing costs are a big one for sure. Basically, you want to think about your upfront costs of buying a home and then also your ongoing costs of owning the home. So for upfront down payment, which we're obviously about to talk about a bunch closing costs, of course. Can't forget moving right diving into the down payments, since that's a big part of their question. Down payment's going to vary depending on the type of home loan you're using because different kinds of mortgages require different minimums and it's always expressed as a percentage of the house's purchase price.

[Sean Files]

We know the housing market is a bit, shall we say, dysfunctional at the moment. Houses are super expensive, interest rates remain pretty high. I saw a stat from Harvard's recent report on the state of the housing market that said that housing prices have gone up 60% nationwide from 2019 to 2025. That's 60% is just bananas. And putting together a down payment for an expensive house can be a real challenge. But folks don't typically have to put down 20% anymore, right?

[Kate Wood]

Absolutely right. You do not have to put down 20%. So with a conventional loan, which is by far the most common type of purchase loan in the US, you can put down as little as 3%. And again, 20% is something that you might only see with a jumbo loan. In 2024. First time home buyers put down a median down payment of 9%, according to the national association of Realtors. If you're wondering why do we all think we need a 20% down payment, it just goes back to one characteristic of conventional loans, which again, by far the most common mortgage in the US. So if your down payment is less than 20%, you have to pay for private mortgage insurance until you reach that 20% level of equity in the home. And this was yet another mistake that like naive pre nerd while at Kate made. I was convinced that I needed to avoid PMI private mortgage insurance at all costs and put down 20%. And realistically, if I had just made a smaller down payment, I could have afforded a nicer home that would have probably cost me a lot less to repair and maintain.

[Sean Files]

Yeah, you bought a super old house, right? The 1700s or something?

[Kate Wood]

Yes.

[Sean Files]

I'm amazed that house wasn't haunted. I asked you like five times.

[Kate Wood]

Everyone asked. It's fine.

[Sean Files]

Well, when I bought my house, I put down 3%, which was really the only way I could afford to buy a home. I did have PMI and I did resent it, but I was able to get rid of it once my home accrued in value and I had my loan for two years and it wasn't that difficult to do. Even though my lender did make me jump through a couple hoops to do it, I was adamant and got it taken care of. It's not a big deal.

[Kate Wood]

Absolutely. And you know that is the plus side, right, of those home prices going up. Like Sean mentioned, horrific if you're a home buyer, but if you're a homeowner, your equity is increasing without you having to do a single thing. So that's kind of amazing. Overall, PMI just like not the boogeyman people. And by people again, I also mean me six years ago. So that's down payment. But let's hop back over to the other really big one that Elizabeth mentioned, closing costs. So closing costs are all the money that you pay to close the deal on the home and that includes a bunch of different stuff. The total is usually between 2% and 6% of the amount of your loan. So just to clear that up, that's not the purchase price. Your down payment is a percentage of the purchase price. Closing costs are going to be a percentage of the loan amount, which is your purchase price, minus your down payment amount. And that includes a lot of stuff. All the fees that you pay to the lender, services that you need to pay for like your title search and appraisal. You often have to make prepayments toward things like homeowners insurance, property taxes. If you're in a state that requires an attorney, real estate attorney fees, it kind of goes on and on. And also if you're using a government backed loan, like an FHA loan or a VA loan, those have their own upfront costs that are included in closing costs as well.

[Elizabeth Ayola]

Okay, all I heard when you explained that is dollar signs to ching cha ching cha ching. So is there a way that people can calculate in advance what those closing costs are going to be, especially if they potentially need to save for it ahead of time?

[Kate Wood]

Absolutely. So when you are pre approved for a mortgage. So this is before we're actually applying for the loan, we're feeling things out here. When you're pre approved, the lender will give you a document called a loan estimate that is going to detail all of the closing costs and it'll clearly separate which are sort of set in stone and which are ones that you could negotiate or potentially shop for. This is a uniform form that all lenders have to use. So it's going to be identical everywhere. One closing cost that I didn't mention and that actually isn't included in the loan estimate because it's essentially separate is the real estate agent commission. So traditionally, certainly when I bought my home, certainly when Sean bought his home, sellers would pay both the buyer's agent's fee and their own agents. So there was a big settlement with the national association of Realtors last year. The upshot of that is that in theory, that's no longer the case, that sellers sort of must pay it. But what we're seeing now in practice is that sellers are generally still footing the bill for both agents.

[Sean Files]

Well, I want to talk about home maintenance. Houses can easily become money pits, especially when they are several hundred years old, as you know well. And when you are in a primary residence that that hasn't had a lot of repairs made to it and you haven't budgeted for this, it can be a big drain on your savings. So what are your thoughts around how much people should be putting aside for home maintenance amid all these other expenses that we've been talking about?

[Kate Wood]

It is really, really vital to set things aside for home maintenance particularly, too, because, like, at the more affordable end of the housing market, you are likely to see properties where there's been a lot of deferred maintenance, particularly people aging in place, they might not be as able to take care of the home to do the basic upkeep. So you want to make sure that you have money for that. That said, honestly, even if you are buying a brand new home, you're buying it from the builder. You really want to make sure that you've got cash on hand for any unexpected repairs, things that you want to change right away. Because really, when you've just bought a home, you are in nesting mode, right? Like you might have never been in a Home Depot in your life, and suddenly it's your home away from home and you're like humming their little jingle and all that stuff, right? And you're going to need money for paint and garden tools and like, all the stuff that you're seeing there. So generally, it's recommended that you try to set up an emergency fund that is just for your home. Ideally, you're trying to save up 1% of your home's current market value per year.

[Elizabeth Ayola]

All right, Kate, can you give us an example of how much people should be looking to save if they want to buy a house? Because like you said, they're going to need more than a down payment.

[Kate Wood]

Apologies in advance. This is going to be a lot of numbers, but let's just get into it. Okay? So we've got at least 3% of the purchase price for your down payment, 2% to 6% of your loan amount for closing costs. And then again, on top of that, you are going to need cash on hand for stuff like moving new furniture, repairs. So if we look at the median price of existing homes in the US In May, that's the most recent month that we have data for that median price, according to the NAR, was just over $420,000. So if we're looking to save up 3% of that price, our down payment would be $12,600. Again, there are plenty of reasons you might want to go over 3%, but we do not need 20, and I can't emphasize that enough. So on top of that minimum of almost 13 grand, we're also going to need 2% to 6% of the loan amount for closing costs. So if we're making a 3% down payment on this $420,000 home, our loan is going to be $407,400. And I need to start round numbers are getting too elaborate. Okay, yeah. But with that loan amount, we're looking at closing costs that are in the neighborhood of 8,000 to $25,000.

[Elizabeth Ayola]

Wow.

[Sean Files]

That's a huge range.

[Kate Wood]

It's a big range. Right. And so then if we put that together. So that was just our closing costs and our down payment, we're looking at between $21,037,000.

[Elizabeth Ayola]

Wow.

[Sean Files]

And this is why buying a house is so difficult.

[Kate Wood]

I know, right?

[Sean Files]

It is.

[Kate Wood]

It is. And if we want to go ahead and add that emergency fund to it. Right. Percent of. We'll assume the value is $420,000. Right. That we just bought the house. So that's another $4,200 that we're trying to save. So now you're looking at saving a minimum of more than $25,000 in this economy, Kate. I know, I know, I know, I know, I know.

[Sean Files]

But this is why we say slow and steady. And that's why it's important to also focus on the emergency fund while you're saving for this down payment, even though that might be kind of counterintuitive. Cover all of your bases at the same time, so you're not putting all of your money in one savings basket.

[Elizabeth Ayola]

And also to remember that buying a home is an incredible achievement, but you don't want to be in a situation where your home is a money pit. And that's actually what put me off of buying a house during the pandemic, because I'm like, yeah, sure, I'll have a house, but I'll also be cash poor because all my money will go towards the house.

[Kate Wood]

So absolutely, yeah. You don't want to wind up in a situation where your house poor. One thing I wanted to say, what I just went through, if it sounds like a lot of money, like that's because it is a lot of money. That was a lot of money that we just talked through. And so that's why something that I always recommend to people, especially if you're a first time home buyer, look into down payment assistance programs. These exist everywhere in the United States and they're generally fairly underutilized. So every state offers these through their state housing authorities, but you could find them potentially at the city or county level. And the kind of assistance they offer is going to vary. Sometimes it's a really low interest loan or a deferred interest loan, but other times it's grants. So that's literally free money to help you buy that house. It's also really important to know that these aren't always income based. Sometimes it's just about the location. And also if you aren't exactly a first time buyer, these programs usually define first time buyers as someone who hasn't had an ownership interest in a property in at least three years. So even if this isn't your first rodeo, like in a technical sense, you might still qualify.

[Elizabeth Ayola]

What a wonderful silver lining, Kate. Thank you. To balance out that high cost.

[Kate Wood]

So oh my goodness, anything I can do.

[Sean Files]

Well, Kate, thank you for coming on and sharing your insights with us. As always, of course.

[Kate Wood]

Thank you for having me back.

[Sean Files]

That's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds. Call us or text us your questions at 901-730-6373. That's 901-730-N E R D. You can also email us at podcastnerdwallet.com join us next time to hear about opening a High Yield Savings Account and whether it makes sense to use an IRA as a short term savings vehicle. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes. And don't forget, if you want us nerds to look over your budget with a fine tooth comb and give you our thoughts and tips, Head to the show description and click on the link to the Google form and submit your info.

[Elizabeth Ayola]

And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes and it might not apply to your specific circumstances. This episode is produced by Tess Figuelen and Ana Hilhosky. Hilary Georgie helps with editing. Nick Karisimi mixed our audio and as always, we'd like to give a huge thank you to NerdWallet's editors for all their help.

[Sean Files]

And with that said, until next time, turn to the nerds.

[Elizabeth Ayola]

Okay, before we let you go, Sean and I want to give another reminder about our giveaway. You could be one of seven winners of some really nice Smart Money merch. One person's going to get a pair of Sony ULT wireless noise canceling headphones and six winners will get the Bagu Cloud Carry on bag, which I heard Sean has and it's really nice. All you have to do is fill out our listener survey, which only takes a few minutes. You'll not only be helping us make the Smart Money podcast even better, but you'll also be entered for a chance to win those awesome prizes. Just go to nerdwallet.com podsurvey and complete the survey form by September 15th for a chance to win. You can read the official rules for more details, which again can be [e-mail] PodSurvey thank you and good luck.