This is something I wrote here, back in 2008, but it's advice I continue to give to anyone who is just starting to think about wanting to buy a house...
Practically speaking, you should really be able to afford the payments you'll be making once you buy a house. It makes sense that people should be able to make the payments required of them for mortgage, insurance, & taxes (and we're not even talking about household maintenance). Part of the correction happening now is that for the most part, buyers are being required to put 10-20% down for a home purchase. This is certainly a shift from the not-so-long-ago days of 100% (or more!) loans.
How does one save $45,000? $100,000? Going in, it can seem daunting & overwhelming. True, it would help if you've been saving or if you have family that could offer some assistance in gift money, but the reality is that you have to start somewhere and not all family members have an extra $10,000 or $20,000 lying around to help get you started. One of the best ways to get saving for a down payment is to play house.
Playing House
Let's assume you're renting now and want to buy a house in the next few years. Let's also assume you're paying $1,500 a month in rent. You want to buy a house and figure you can afford to buy something in the $450,000 range. You plan to save 10% ($45,000) for your down payment.
The basic premise of playing house is that you want to pretend you have all the bills now that you will have once you're a homeowner. You will have to pay these bills once you buy your house so you should be able to pay them now if you feel you're in the position to be a homeowner. Take the total of all new "homeowner bills" and subtract your current rent from that total so you know how much you can expect your cost of living to increase. No, these will not be exact numbers, but it can be close enough. The extra you need to pay as a homeowner gets put into a savings account that you do not touch. This savings account will become the down payment on your house.
Okay, let's play....
Your new mortgage: A $405,000 loan ($450,000 purchase price -$45,000 down payment = $405,000 loan) in today's market will cost you around $2,500/month for a fully amortized mortgage (meaning not interest only).
Property Taxes: In the Bay Area Realtors & loan officers will typically use 1.3% of the purchase price of a home as an estimated tax rate. In this scenario this represents $5,850/year or $488/month
Insurance: Let's estimate you'll pay around $1,200/year, or $100/month
Utilities: Typically when you rent water and garbage is paid by the landlord, but when you own the property you're paying these utilities. Also, your gas & electric bill will likely go up with more space to have to heat & light up. Let's say water is $25/month, garbage is $30/month, and the gas & electric will go up around $50/month
Home Repairs & Maintenance: This is a truly variable figure and depending on the type of home you choose it could be covered by a Home Owner's Association (if you do buy into an HOA make sure to include those dues in this calculation as well) or you could be on your own to maintain everything from the landscaping to a leaky faucet to roof repairs. I don't want to go overboard here, but I'd like to be somewhat realistic as well. Let's give this section of savings around $100/month
Okay, that should just about do it. Let's total up the expenses of owning a $450,000 home:
Mortgage $2,500
Taxes $488
Insurance $100
Utilities $105
Maintenance $100
Total: $3,288
Current rent $1,500
Added cost to own the home: $1,793 every month
Now, you have to start pretending you bought the house already and have these bills coming in every month. Open a high-yield savings account (ING, Emigrant, or the like [2015 edit: Barclay's online savings currently offers one of the highest returns in a savings account]). Set up auto-debit from your checking account so that every month $1,793 gets transferred to the savings account.
If you find it's too tight on your budget to do this, you need to re-evaluate if buying a house is the right move for you. You could decide that maybe $450,000 is more than you can afford and choose to look at a condo instead (where water, garbage, hazard insurance, and maintenance all fall under the HOA dues you'd pay each month). However, if you find that with some simple lifestyle adjustments you can swing the extra $1,793 each month then in about two years of consistent and untouched savings you'll have your $45,000 down payment and more importantly, you'll know that you'll have no problem with the additional costs of being a homeowner.