how much money should i save before buying a house

How Much Money Should I Save Before Buying A House

There’s no magic figure that someone should save before buying a house. There isn’t even a formula involved, because it’s so dependent on the market that you’re in.

But that doesn’t mean that I can’t offer some guidance.

If you’re trying to buy a house in a hot market, you likely want some reassurance that you’re doing the right thing financially. There’s good news and bad news.

The good news is that you probably need to save less money than you think. The bad news is that the purchase may be more expensive than you realize.

How Much You Need to Save Before Buying a House

What do I mean above?

Well, a lot of people think they need a 20% down payment. But that’s not true. Very few people have that today. So, you probably need less actual cash than you think you do; you could already be in a very good position to buy.

But a lot of people don’t consider closing costs, which can be considerable. Closing costs can range from $7,000 to $20,000—it depends on the cost of the property, loan origination fees, points, etc. They’re thinking about buying a $200,000 home, but it could cost them $215,000 to do it.

So, you need to consider both factors; you may be spending a little more than you think, but you may not need to actually put as much cash down as you anticipated.

Another cash consideration is earnest money. In most markets, you’ll be putting down less than $5,000 in earnest money. But in hot markets, you could find yourself putting down $20,000. Ask your real estate agent what the norm is for homebuyers in your area.

How Much Do You Need for a Down Payment?

As I said, a lot of people think they need a 20% down payment to buy a house. But very few people actually have that much saved. So, how much should you put down?

The answer is: it depends on the circumstances.

If you’re buying in a hot market, you may need to move quickly and put down as much as you can. Or, if you’re buying a fixer-upper, you may be able to get away with a smaller down payment because the bank knows you’ll be investing more money into the property.

For an FHA loan, it’s usually 3.5% down. A VA loan requires nothing down. And a conventional loan can range from 5% to 20%. In general, a bank usually wants you to put more down on a conventional loan the riskier the loan appears to be.

Further, it depends on how much you qualify for. If you qualify for a $300,000 mortgage but you want to buy a $400,000 property, you’ll need $100,000 down, regardless of percentages.

who pays closing costs

How Much Will You Need for Closing Costs?

This is a harder question to answer because it depends on the property, the bank, the loan program, and other factors.

Generally speaking, you can expect closing costs to be around 2% to 4% of the purchase price of the home.

For example, if you’re buying a $200,000 house, you can expect to pay $4,000 to $8,000 in closing costs.

If you’re buying a more expensive home, you can expect to pay more. Almost every fee, including home inspection fees, is going to go up depending on the cost and size of the property.

In the old days, buyers could sometimes get sellers to pay for closing costs. But the old days are here no more; the market is so hot that it’s very unlikely.

how much money should i save before buying a house

Your Money and the Bank

It should be noted here that the mortgage company generally wants to see you with six months of mortgage payments in the bank even after closing.

This isn’t a hard-and-fast rule, but if you can’t show this, the bank may be very nervous about lending to you.

In an ideal world, you should have this cash buffer available regardless; you could lose your job or there could be serious repairs necessary.

Or you might just want to buy some furniture.

Credit Card Debt, Saving, and Debt-to-Income

When home buying, many borrowers wonder if it’s better to pay off every credit card or save for their down payment and closing cost. Paying off your debts will increase your credit score, which will also lead to a better interest rate.

In general, it’s better on a personal finance level to pay off your debts first. But if you have a small monthly payment on a credit card or personal loan, it’s not the end of the world.

Just remember that your debt-to-income ratio is going to be used to determine how much of a mortgage payment you can afford; it will have a direct impact on the size of the mortgage loan you qualify for as a home buyer.

Go through the home loan pre-approval process early to estimate your monthly mortgage payment and home affordability. You may find you need to pay off credit cards or student loan debt before you can afford the expense of a home.

piggy bank

Private Mortgage Insurance

Another thing to consider is PMI (private mortgage insurance). If you put down less than 20%, you may have to pay for PMI. This is insurance that protects the mortgage lender if you default on your loan.

You’re essentially paying for someone else’s peace of mind, and it can be expensive-the annual premium can range from 0.3% to 1.5% of your loan amount.

For a $200,000 mortgage, that’s $600 to $3,000 a year.

You may be able to cancel PMI once you reach 20% equity in your home. But this isn’t always the case, so check with your loan officer. it largely depends on the loan product that you’re using. There are some loan products that have permanent insurance.

How Can You Reduce the Amount of Cash You Need?

  • If you want to reduce the amount of money you need to buy a house, there are a few things you can do:
  • First, get pre-approved for a mortgage. This will give you an idea of how much the bank is willing to lend you and what interest rate you’ll be paying. If you shop around for a mortgage, you can look for better deals. You may be surprised at how much you can save by simply getting multiple quotes.
  • Second, look for a less expensive house. It’s obvious, but it bears repeating: the cheaper the house, the less money you’ll need. It’s not just a matter of the value of the property. Everything else becomes less expensive, too. The taxes, the insurance, the utilities-it all goes down.
  • Third, consider an alternative financing option. If you’re a veteran, you may be eligible for a VA loan that requires no money down. Or you might be able to get an FHA loan with a 3.5% down payment. There are also conventional loans available with as little as 5% down. If you have good credit, you may be able to find a loan with a low down payment and low-interest rate.
  • Fourth, put less money down to give yourself more wiggle room for other things. A lot of buyers feel like they need to put as much down as possible. But if the interest rates aren’t too high, it may not matter.

It all depends on your circumstances. If you’re buying in a hot market, you may need to put down as much as possible to move quickly.

Why do sellers care how much you put down? How much you can put down indicates how likely a loan is to close. If you’re putting down 50 percent on your mortgage, it’s very unlikely that the loan is going to fold.

Conclusion

The amount of money you need to save before buying a house depends on a number of factors, including the price of the house, the type of loan you’re getting, and your own financial situation.

If you’re careful and shop around, you may be able to find a loan that requires a smaller down payment. Or you may decide to buy a less expensive house to reduce the amount of money you need.

In any case, it’s a good idea to have at least six months of mortgage payments saved up before you buy a house. This will give you a cushion in case of job loss or unexpected repairs.

FAQs

How much of a down payment should you have to buy a house?

Ideally, you should have a 20% down payment to buy a house. This will help you avoid having to pay private mortgage insurance (PMI). If you’re unable to come up with a 20% down payment, you may be able to get a loan with a smaller down payment. But you’ll likely have to pay PMI.

How much money should you save for house repairs and maintenance?

You should have at least 1% of the purchase price saved for repairs and maintenance. So if you’re buying a $200,000 house, you should have at least $2,000 saved. But that’s really the bare minimum and it should be adjusted based on the condition that the property is in.

What other costs are there besides the down payment?

There are a number of other costs to consider when buying a house, including closing costs, moving costs, and furniture. You should also have an emergency fund to cover unexpected repairs.

How much does it cost to buy a house?

The cost of buying a house depends on a number of factors, including the price of the house, the type of loan you’re getting, and your own financial situation. But in a worst-case scenario, assume that you’ll spend about 5% of the house’s purchase price.

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