How Much Money Do You Need to Buy a House?

Buying a home is likely one of the most expensive purchases most people make in a lifetime. In order to cover these high costs, many people apply for a mortgage loan through financial institutions. This involves paying a percentage of the home’s purchase price, and financing the rest of the home through a mortgage loan to be paid back over a period of years. When making a home purchase, most people only consider the down payment. However, there are many costs to consider and prepare for when you are making your financial plans for buying a new home.

• Home down payment: The down payment of a home is a percentage of the home's total purchase price that the buyer must pay upfront to secure the purchase of the home. Down payments vary depending on the type of mortgage that a person has. With a conventional loan, a down payment of 20 percent is preferred by the financial institution and results in a lower percentage of interest for the borrower. Most lenders will require borrowers to purchase private mortgage insurance (or PMI) if they are putting any less than 20 percent of a home’s purchase price down. With a Federal Housing Administration loan (FHA loan), you could be eligible for a loan as low as 3 percent. With USDA loans and VA loans, which are available to veterans and service men and women, zero down payment is required.
• Closing costs: Closing costs will vary for different homebuyers, but most people can expect to pay between 2 and 3 percent of their mortgage loan in closing costs. Closing costs include application fees, appraisal fees, title searches, title insurance, private mortgage insurance, homeowner's insurance, attorney fees, home inspections, and real estate transfer and mortgage taxes. A safe estimate for calculating closing costs is 2.5 to 3 percent of your home loan amount.
• Earnest money: Some lenders will require borrowers to pay property taxes and homeowners insurance in advance, and keep them in an escrow account. The lender may collect between two and 12 months of property taxes to ensure that the taxes are available to pay.
• Utility adjustments: Utility adjustments costs cover any utilities the seller has paid for in advance that the buyer will benefit from. This may include water and gas bills, or other utility adjustments like trash removal. Typically these costs don't exceed a few hundred dollars.
• Cash reserves: Some lenders may require a home buyer to have a certain amount of cash reserves in their bank account after all the above costs have been paid. This may mitigate the risk of the buyer defaulting on their loan. The buyer should be prepared to have the necessary cash reserves left over after all closing and other associated costs have been paid.

The upfront cash requirements for homeownership will typically include the down payment, closing costs, and other associated costs. Here is a detailed breakdown of the fees that you will be responsible for when you purchase a home.

• Down payment: The amount of a down payment on a house is negotiable, and can be affected by your credit score. Paying off credit card debt before applying for your loan can also help you negotiate better mortgage rates. First-time homebuyers may be eligible for a lower than average down payment, but will incur greater interest rates on the mortgage payment. This can be anywhere from 3 to 10 percent of your home’s purchase price.
• Origination fees: An origination fee is one of the closing costs associated with purchasing a home. This is a small fee—typically between 0.5 and 1 percent of the loan amount—that the lender collects to cover the costs of starting the loan.
• Application fees: An application fee is another closing cost. Some lenders may charge an application fee for the loan which covers administration costs and the credit report. This is typically around $400 dollars.
• Appraisal fees: This fee covers the third-party appraisal of the property so that the lender can determine the market value of the home. Mortgage lenders will typically require the borrower to pay for an appraisal before their loan is approved. This fee is typically factored into the closing costs associated with the purchase of the home.
• Title searches: This fee covers the costs for a title company to check that the property has a clear title and the title will be transferred fully to the new buyer. It is typically a couple hundred dollars. This is another closing cost.
• Title insurance: Title insurance is also factored into the closing costs of a home. This protects the mortgage lender from any liens on the property that the title search didn’t discover. The buyer is responsible for covering the lender's title insurance, and may also purchase their own title insurance.
• Attorney fees: Some states require closings on real estate to be handled by attorneys. The buyer is responsible for covering the attorney's fees.
• Home Inspections: The home appraisal is to determine the home's value, but a home inspection may be required to check for any structural problems within the home that the appraisal may have missed and may impact the resale value of the home.
• Real estate transfer and mortgage taxes: Real estate transfer taxes vary from state to state, but will typically be a small percentage of the total home price under 10 percent.
• HOA fees: These cover any associated costs owed to a homeowners association, which may apply in development communities or condominium complexes. These typically include maintenance fees, additional insurance, and trash removal costs.

Here are a few things that homebuyers can do to make sure that they have enough money to purchase a home.

1. 1. Decide on your down payment rate. Depending on your lender and the type of loan you are applying for, this percentage may vary. For a conventional mortgage, 20 percent of the total cost of the home is a safe estimate, but you may only have enough money to pay 5 or 10 percent of the home’s value. If you go with a lower down payment, make sure you have enough money to cover the costs associated with your mortgage like interest and private mortgage insurance.
2. 2. Verify that your down payment source is acceptable. Most lenders will need to know the source of the funds for your down payment. People often use a combination of their own funds and money lent to them by a relative to furnish a down payment. Others may dip into an employer-funded retirement plan. However, it is not possible to use cash or lines of credit to pay a down payment. The money for a down payment must be liquid and in an account.
3. 3. Furnish your closing costs. To account for all closing and other associated costs, budget for an additional 2.5 percent of your total mortgage.
4. 4. Make sure you have enough cash reserves. Conventional loans can ask for up to six months of your monthly mortgage payments in cash reserves, which lenders can see in your checking or savings account. Budgeting for six months of mortgage payments will give you an excellent safety net, even if less is required.

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