How much money do you need to buy a house? It’s a question that will get you plenty of different answers depending on whom you ask. Yes, the exact amount will vary greatly based on the asking price of the home, but surely there’s still a way to at least get a rough estimate?
You’re in luck! There is. While everyone knows that you have to save up at least 20% of a home’s purchase price for the down payment, there are still other little bits and bobs that you have to pay for to officially become a homeowner.
By discovering these things in advance, you are actually saving yourself a significant amount of stress and surprise. This is because you know that you need to set aside funding for them as well.
We will list them here, so as you begin to budget for the home of your dreams, nothing can throw you off track.
How much is the… down payment?
The down payment is the most known expense when buying a house. When most renters begin saving up to make the official transition into homeownership, they are actually just saving up their down payment.
In the real estate world, it’s pretty common knowledge that unless you take out a specialty mortgage loan (like one from the FHA), that your down payment needs to be about 20% of the total amount of your home.
So, if you wanted to purchase a home that is $250,000, then your down payment would be $50,000. Depending on your income, this could take a while to achieve.
However, there are a few alternative payment options if that number seems unattainable to you. Remember, as soon you as dip below 20% on a down payment, most home loan lenders will require that you pay for private mortgage insurance (also known as PMI). This is another additional expense, but it can be spread out over the course of the loan if the larger down payment is too much for you.
If you are willing to purchase this insurance, then you also have the option of negotiating with your lender to get your down payment down to 15% or even to 10% of the total purchase price. As mentioned there are also “specialty loans” available for individuals with lower incomes and lower credit scores that require down payments as small as 3.5%.
So, on that same $250,000 house, if you finance it with an FHA loan, the down payment would only be $8,750 – a stark contrast to the traditional $50,000. However, you should always be working on building up the number on your credit report, be it through using less of your limit on your credit cards of faithfully paying off your student loans.
How much are… closing costs?
The next thing you have to budget for when thinking about the money needed to buy a house is the closing costs. The tricky thing about closing costs is that they are up for a lot of negotiation and the responsibility of paying them can sometimes be split up between the buyer and the seller.
However, to avoid unnecessary emergencies or dramas, it’s always a good idea to save up enough cash to cover them all yourself, just in case.
Although the exact amount of closing costs can vary from state to state and from lender to lender, very generally, you can expect to pay about $4,000 to $6,000 on top of your down payment in order to purchase your home.
These state differences can come from varying real estate taxes and different rates for the home appraisal, lawyers, and title insurance.
Here is a list of standard closing costs, as well as their typical price:*
|Item Required for Closing ||Fee |
|Loan Origination Fee ||$2,500 (1%) |
|Discount Fee ||$625 (0.25%) |
|Processing Fee ||$450 |
|Underwriting Fee ||$500 |
|Wire Transfer ||$25 to $50 |
|Credit Report ||$35 |
|Tax Service ||$50 |
|Flood Certification ||$20 |
|Title Insurance ||$550 |
|Escrow/Signing ||$450 |
|Courier Fee ||$20 |
|Appraisal ||$450 |
|Recording ||$110 |
|Homeowner’s Insurance first-year premium ||$700 |
|6 Months’ Property Tax Reserves ||$1,500 |
*We based this list of fees on a typical mortgage loan of $250,000. If your loan is for any more or less than this, you will need to adjust certain amounts based on the percentages given.
We also did not include mortgage points in this fee assessment. Mortgage points are bursts of extra money that you pay up front to lower the mortgage interest rate on a permanent basis, thus significantly lowering your monthly mortgage payment and the overall loan amount.
How much are… utility costs?
The next thing you need to be aware of when you try to close on a home are the utility costs. These are pretty confusing for most homebuyers, so make sure to read this next section carefully. You need to know exactly how much money to bring to the table.
Usually what happens when you apply for a mortgage is that the lender will put all of the real estate taxes and homeowners insurance money into the escrow account to stay safe until closing day. This means that these charges are set to be included in your monthly payment. The lender then pays them for you each month.
To facilitate this, your lender needs to charge a certain amount of these fees upfront. This way, they can make sure that, at least on their end, the payments are never late. It’s pretty easy to understand: the money you pay each month builds up the amount in the escrow account that disburses funds for these monthly expenses.
State laws vary, but usually your lender will put at least two months of real estate taxes into the account, and sometimes as much as 12 months.
As you can see from our handy table, the same sort of principle applies to homeowner’s insurance. When make a home purchase, you usually have to put in about one year’s worth of homeowner’s insurance money up front. There is some wiggle room on this, however, depending on how large your down payment is – so don’t think that you have to do both.
How much do you need for… cash reserves?
The final thing to consider when purchasing a home is the cash reserves that your lender is going to require to have on hand. This is something that most homebuyers don’t know anything about, so when they have to pay it, they are shocked! Don’t let this be you.
Cash reserves make a lot of sense when you think about them. After you pay all of the closing costs, utility bills, and your down payment, you lender wants to make sure that the next month, you will still have enough money to make your first monthly payment.
It doesn’t matter if you can cover everything up front if you can’t sustain the mortgage in the long term. This used to happen so much that there is even a name for it in the real estate community “ closing broke.” Those who are closing broke spend all their money up front and unfortunately end up in an early-term default because their income isn’t coming in fast enough for them to replace all the money they spent.
Usually, a lender will require at least two months of payments. So, let’s say your first two mortgage payments (including principal, interest, taxes, and insurance) will be $2,000 a month. Then you will need to have $4,000 extra at closing.
You don’t have to give this money to the lender at closing. You just have to be able to prove that you have it. Usually showing a bank statement for any kind of account will do the trick.
So how much money do you need to buy a house?
Let’s say you take out a $250,000 loan to buy a house.
20% down payment of $50,000 + $7,985 (sum of the expenses in the table above) + $4,000 cash reserve = $61,985
This is a very rough calculation, but can hopefully give you a good idea of what you’ll need on hand to make a successful bid on a property and turn it into your home.