How much money do you need to buy a house? Where would you reside if money were not an issue? Which would you prefer: a posh condo in a posh township with amenities like a clubhouse and a swimming pool or a cozy private villa complete with a garden, distant from the hustle and bustle of the city?
Even if you have developed realistic expectations for the type of home, you can afford, being inundated with advertisements that feature overly edited glamour shots of stunning bedrooms with sea views and lush gardens teeming with playing kids will tempt you to yearn for a house that is at least somewhat, if not significantly, outside of your price range.
Everyone may have a different conception of their ideal home, but as most people view money as a limited resource, their goals should be scaled back correspondingly. But when they decide to take the plunge and make their dream a reality, most homebuyers push their financial limits.
However, are the larger bedroom, connected patio, and Italian marble floors necessary? You can damage your finances irreparably by attempting to purchase that ideal house.
The costs involved also go beyond the house’s asking price, so if you don’t account for these extra charges, you could be in for a nasty shock.
1. How Much Money do You Need to Buy a House – What is a Down Payment?
The down payment is one of the largest upfront costs when purchasing a property. The down payment, which should not be confused with closing fees, is part of the purchase cost you prepay at closing.
In general, putting less money down on a property at closing will cost you more in fees and interest over the life of the loan.
The amount you put down influences how much money a lender will loan you and what kind of mortgage suits your requirements. But what constitutes the ideal down payment sum? Over time, paying too little will cost you money in interest and other costs. A lot could harm your long-term financial stability or deplete your funds.
Although mortgage lenders historically required 20% down payments, this is no longer the case. The typical down payment is significantly lower. You can now obtain a mortgage with as low as a 3% down payment.
1.1 Building Your Down Payment
The high upfront cost requires work regardless of how much you decide to put down when buying a home.
- Put your savings to work: Examine the interest rates offered by several places to deposit your money rather than saving in a low-return account. Make sure you have access to cash when you need them, regardless of the instrument you select. For example, a savings account can be your best option if you want to buy a house within the next 12 months.
- Narrowing down your spending: If you value homeownership, eliminate or decrease needless expenses such as cable and TV service, eating out, vacations, and other non-essentials. Spending less means saving more for a down payment and having more money to pay off other debts. Making sacrifices today can help you achieve your homeownership aspirations later.
- Ask for help: If a family member or close friend has the money and cares about you enough to offer it without conditions, you might use it as a gift for the down payment. Prepare a gift letter from a friend or relative outlining why you won’t be required to repay the money because the lender will want verification that it is truly a gift.
1.2 Types of Loans to Fund Your Down Payment
- FHA loans: The Federal Housing Administration, which insures FHA loans, generally has a more liberal attitude toward down payments. They permit loan revenues from authorized down payment assistance programs in addition to accepting your own money or a gift as a down payment. It might enable the use of 100% funding for an FHA loan.
- VA loans: The down payment is usually not a problem with VA loans (government-backed loans for veterans, service members, and surviving spouses). The down payment is essentially meaningless with VA loans because they typically offer 100% financing.
2. How Much Money do You Need to Buy a House – What is Earnest Money?
Home buyers pay earnest money in cash when the seller accepts their offer. Deposits of earnest money show that the buyer is committed to making the purchase and will follow through.
Payments for earnest money aren’t made directly to the seller. Amounts paid as earnest money are held in escrow until closing. At closing, the escrow company releases the funds for the down payment and closing charges or returns the funds to the buyer.
Your earnest money might, in some cases, be forfeited to the seller.
The seller may decide to keep your earnest money if, as the buyer, you fail to meet your requirements to obtain mortgage approval or if you decide not to proceed with the transaction. Because of this, the earnest money is occasionally referred to as a good-faith deposit.
Depending on the price of the home sold, an earnest money deposit will often be between a few hundred and a few thousand dollars. Larger earnest money checks are often needed for homes with higher price tags.
3. How Much Money do You Need to Buy a House – Closing Costs
Things start to become a little more challenging at this point. This is because the total amount needed to make the purchase is substantially larger than the down payment.
Closing expenses might be between 2% and 6% of the home’s purchase price. In a competitive real estate market, you can occasionally request that the seller cover all or a portion of your closing costs, but they are less likely to do so.
One type of point is an origination charge. The fee will typically range from 0.5% to 1% of the new mortgage balance. It serves as payment to the lender in exchange for placing the loan. Another kind is discount points. They stand for the points paid to lower the mortgage interest rate permanently.
For instance, you can lower your mortgage interest rate by about 1/8 of 1% (0.125%) by paying a discount charge of 1% of the loan amount you have. Paying discount points to reduce the interest rate is typically not advised, but if having the cash to close is a problem. Usually, the tiny monthly payment reduction is insufficient to offset the upfront cost of the discount points.
3.1 Types of Closing Costs
- Appraisal fee: Your lender will request an appraisal of the property from an appraisal management business once you’ve signed a purchase agreement, and you can anticipate paying an appraisal fee. Although the price can go higher, an assessment normally costs between $300 and $600. For instance, a home with numerous units or a remote location can cost extra.
- Application fee: Although not all lenders impose this charge when they do, it often covers both the appraisal price and the cost of the credit report. It will typically be roughly 1% of the loan amount if charged.
- Title fees: The title company will levy title fees, which go toward the expense of a record search the company conducts to ensure the property you’re buying is free and clear of any prior claims or judgments. This includes several fees, such as title search fees and title insurance. These costs will account for a sizable portion of your closing expenses.
- Mortgage origination fees: The expense of processing and underwriting your mortgage loan is covered by the mortgage origination charge. Typically, this fee runs from 0.5% to 1% of the overall loan amount. Another name for this is processing or underwriting.
4. How Much Money do You Need to Buy a House – Prepaid Costs
The most perplexing fees for homebuyers are arguably these, but they are absolutely necessary.
Most mortgage lenders will “hold in escrow” homeowner’s insurance and real estate taxes. This implies that the lender will pay those due fees and include them in your monthly payment.
To ensure that the money is available, the lender must first collect a particular amount for that to happen. The escrow accounts are created to cover the fees on the following due date, and a portion of your monthly payment reloads the escrow account for the following due date.
4.1 Real Estate Taxes
Depending on where you live and how frequently real estate taxes are collected, the lender may be required to hold 2 to 12 months’ worth of real estate taxes in escrow. If the property taxes are $100 a month and a six-month escrow is necessary, there will be a $600 prepaid charge at closing.
4.2 Homeowners Insurance
Your home is protected by homeowners insurance in case of a fire, storm, or other natural disaster. It also covers liabilities if someone is hurt on your premises, break-ins, and theft of your possessions.
A one-year homeowners insurance policy on the property and an additional two months’ worth of premium payments are normally required to be paid in advance to the lender’s escrow account. The lender may also escrow one or two months’ worth of PMI premiums if necessary.
5. How Much Money do You Need to Buy a House – Mortgage Payments
It’s important to factor in monthly expenses and the total cost of the property when determining how much cash you will need to buy it.
One of the most consistent continuous expenses is your monthly mortgage payment. Try a mortgage calculator to calculate how much you will pay each month.
Your mortgage rate has a significant impact on your monthly mortgage payment. Thus, it’s essential to compare mortgage rates from several providers. A Consumer Financial Protection Bureau study found that more than 75% of applicants submitted one mortgage application to only one lender. By not shopping around, you could end up paying thousands of dollars extra over the course of the loan.
5.1 Mortgage Insurance
A sort of insurance called mortgage insurance guards against home loan default. People with down payments of less than 20% can buy homes thanks to private mortgage insurance (PMI), which reduces the risk for investors who own mortgages.
This helps to safeguard mortgage investors, as do other steps lenders have taken, like inserting a mortgagee clause in your homeowner’s insurance policy.
Generally, most conventional lenders will ask you to pay PMI if you put less than 20% down on a home. Any loan the federal government does not guarantee is considered conventional.
You should also take into account the increased monthly cost of mortgage insurance. Your lender will automatically add your PMI cost to your monthly mortgage payment. You won’t be allowed to shop around because the lender will oversee choosing the mortgage insurance provider, but you can request a price before submitting your papers.
5.2 How Expensive is Mortgage Insurance?
A premium is what you pay for mortgage insurance. The mortgage cost in mortgage insurance premiums might range from 0.6% to 4.50%. Your down payment amount will determine your premium. Mortgage insurance charges decrease as your down payment increases.
Your premiums will depend on the following:
- Whether the interest rate is variable or fixed
- The period of your mortgage sometimes referred to as the length of your home loan
- Loan to Value ratio
- Your credit score
- Refundability of the premium
For instance, if your credit score is poor and you only put down 3% of the purchase price, your mortgage insurance premiums will probably be greater than those of a buyer with a higher credit score who made a larger down payment on the same house.
6. How Much Money do You Need to Buy a House – Moving Expenses
One important item on your moving checklist is estimating your move’s cost. However, prices will differ significantly depending on how many items you intend to move and the sort of moving service you select. Moving prices will vary significantly depending on the space you are leaving, such as if you are leaving a 1,000-square-foot apartment versus a 4,000-square-foot house.
The good news is that even though actual moving prices are frequently higher than anticipated, you still have a lot of influence over the broad price range for your relocation. You can save tens of thousands of dollars if you’re prepared to put in some effort.
7. How Much Money do You Need to Buy a House – HOA Fees
Homeowners associations, or HOAs for short, are non-profit groups that control how some residential areas are run. Bylaws are established by HOAs and must be adhered to by everyone in the community. They are most frequently in charge of common-interest neighborhoods, townhouses, apartment complexes with several units, or condominiums.
You often have to pay fees if you reside in a community with an HOA. Depending on the location, the amenities offered, and whether or not any specific assessments have been made in the event of a local emergency, these can vary greatly. Make sure it fits into your budget by finding out in advance what your monthly portion will be. Remember that your HOA dues support services vary depending on where you reside and the community’s amenities.
8. How Much Money do You Need to Buy a House – Home Warranty
A home warranty is a yearly agreement that covers the maintenance and repair of major appliances and house systems. In addition to covering specific home appliances like water heaters, garbage disposals, washers, and dryers, a service contract may also cover larger parts like the HVAC or electrical system.
Although it may appear to be a homeowners insurance policy, this is a different kind of coverage. Only structural damage to your home, theft of your personal items, and injuries sustained on your property are covered by homeowners insurance. A house warranty covers interior appliances and systems that need to be replaced or repaired due to regular wear and tear or manufacturing flaws.
Various home warranty businesses offer numerous plans and levels of coverage. The plan you should think about depends on your needs for your property and yourself. There are typically three types of home warranties available:
- Plans for systems: Only particular systems in your home will be covered at this level. For instance, if you get HVAC coverage, your furnace or air conditioner would be covered, but not smaller appliances like your space heater.
- Plans for appliances: This kind of coverage will cover appliances but exclude larger systems. This includes coverage for garage door openers, built-in microwaves, stoves, and refrigerators.
- Combination plans: As you could have imagined, this warranty, depending on the insurance and your service provider, will cover failures of appliances and home systems.
9. How Much Money do You Need to Buy a House – Preparing to Buy a House
Preparing to buy a home will probably take some time. But there are a few additional puzzle pieces to think about during the planning stage in addition to having your money in order.
9.1 Monitor Your Credit Score
When you apply for a loan for a house, mortgage lenders check your credit history. Knowing your credit score in advance is crucial because they will use it to assess your trustworthiness, loan terms, and interest rate.
The type of loan will determine the typical credit score required to purchase a home. FHA and VA loans require a minimum credit score of 580, while conventional loans recommend a score of 620 or higher.
If there is flexibility in your budget, use this opportunity to pay down further debt and make on-time bill payments if your credit report could stand to be higher. And throughout the mortgage application process, make sure to monitor your credit score.
To ensure your loan application is approved, wait until after you close before taking on any new debt. Your score will be examined both early and late in the process.
Paying off existing debt: Lenders will also consider your debt-to-income (DTI) ratio and credit score when applying for a mortgage. Make extra debt payments before applying for a loan if you can afford to do so because you might have trouble being authorized if your debt is high compared to your monthly income. You can lower your debt and raise your DTI by paying more toward credit cards, student loans, and medical debt.
9.2 Set a Budget
Creating your budget is one of the most crucial phases in purchasing a property. Take the time to figure out how a mortgage payment would work with your other monthly expenses so that you can evaluate how much house you can afford. This can help you safeguard your financial future and narrow your price range when looking for a home.
You can get help with this by using the housing expense ratio. This percentage, also known as the front-end ratio, shows how much of your monthly income is spent on housing costs like your mortgage, insurance, and taxes.
Experts advise limiting your housing expenses to 28% of your earnings.
9.3 Comparing Mortgage Lenders
New homeowners frequently experience excitement when beginning the lending procedure. Once accepted, they could be tempted to begin looking and making bids on homes immediately, but if they have a high-interest rate, that could cause a problem.
Instead, before applying, spend some time researching a few lenders and the various kinds of mortgage loans. You can get the best loan and mortgage interest rate by taking this extra step.
Don’t, however, stop there. Before deciding on the best course of action for your circumstances, you should study customer evaluations and consider questions to ask mortgage lenders.
9.4 Be Ready to Make Compromises
Even though home prices are increasing, your budget shouldn’t increase. When purchasing a home, you might have to make concessions to yourself, such as letting go of the necessity for a garage or letting go of the desire for a finished basement. Remember that you may always try to make modifications and changes after purchasing the home.
In addition to your down payment, you’ll also have to pay for insurance, inspections, warranties, deposits, and other expenditures when purchasing a property. Take the first step toward homeownership and begin the mortgage approval process once you’ve evaluated all of the associated charges to find out more about your particular home-buying expenses.