You find yourself asking the question, How much money do I need to buy a house? One of the biggest mistakes is home buyers assuming that all they need to do is come up with 20 percent for a downpayment and then they’re ready to buy a home; unfortunately, it’s not that simple.
Even though it’s not simple, it doesn’t have to be complicated either and this guide is going to help you better understand how much money you need to buy a home.
This guide will discuss:
- Understanding your budget
- Determining your down payment
- Understanding closing costs and moving expenses
- Sources of funding
- Finding the right Realtor
Here are 5 things you need to know when determining if you have enough money to buy a house.
Understanding your own budget
Understanding your own budget is going to be the first step in deciding whether or not it’s the right time to buy a house and also the type of house that you can afford.
There are quite a few costs that go into buying a house, from closing costs and moving expenses to the monthly cost of the mortgage itself, it’s important to understand what you can afford both right now and long into the future.
This leads us into likely the most expensive proportion of buying a home, the down payment.
Determining Your Down Payment
So how much do you need for a down payment? You’ll frequently hear the number of 20 percent of the cost of the house. The reasons for that are:
- Avoid having to pay for private mortgage insurance.
As discussed in our 4 Options for Your First Home Mortgage guide, “since conventional loans are not guaranteed by the government, private mortgage insurance provides protection to the lender in the case that the borrower stops paying on their loan.”
If you don’t qualify for any first time homebuyer programs and don’t have 20 percent to put down on a home, private mortgage insurance will be required until you have gained 20 percent equity in your home.
Although PMI insurance often has a bad reputation, Mortgage loan states that it may not be that bad after all “..by accepting PMI when you can’t afford a 20 percent down payment, you’ll be able to get into a home earlier. Instead of sending payments to your landlord, you can send them to your mortgage lender and build equity in your home.”
According to Nerdwallet, the average cost of private mortgage insurance, or PMI, for a conventional home loan ranges from 0.58% to 1.86% of the original loan amount.
- Becomes easier to qualify for a mortgage.
The more money you are able to put down on a home, the more likely you are to qualify for that mortgage you are seeking and with favorable terms.
You can still buy a house without a 20 percent down payment, but while it will decrease your upfront costs, it will ultimately cost you more monthly as you will still need to buy your own private mortgage insurance. Having less than 20 percent can also increase your interest rate, and in the long-term, cost you significantly more money.
Despite the 20 percent rule that you often hear of, there are many alternatives to help get you into your future home that don’t require 20 percent as a down payment.
Although the down payment is the most expensive portion of buying a home, the closing costs and moving expenses can often be overlooked. Being prepared for these additional expenses can help decrease unexpected (or even worse, unbudgeted costs).
Closing Costs and Moving Expenses
Typically closing costs can add up to anywhere from 2-5 percent of the cost of the house, these expenses include:
- Property Fees (Inspections or Appraisals)
- Loan Fees (Originations or Underwritings)
- Legal Fees
All of these different costs need to be factored into your budget when it comes time to buy a home. The best way to pay these fees is in cash. Sometimes lenders will let you roll these costs into your mortgage, but while that may save you some money in the short term, it’s going to become quite expensive after years of paying interest on top of it.
As discussed earlier, closing expenses are often overlooked. In your budget, be sure to give yourself a cushion that accounts for the closing fees, the last thing you want is to exhaust your savings in order to cover these fees.
Sources of Funding
Next let’s talk about the sources of funding for buying a house. After you have your down payment, where are you going to get the remainder of the funding for the mortgage? The remainder of the funding will come from a bank that lends out mortgages.
There are a ton of mortgage lenders out there and it’s best to do your research before you choose who you’re going to work with. You’ll want to talk to as many lenders as you can in order to obtain the best terms.
Banks will perform credit checks on your history as well as liquidity checks that determine how much cash that you have available in order to determine if you qualify for a mortgage (and what the terms will look like). Finding the best terms can save you significant capital in the long-term even if it requires a little more work up-front.
You’ll also want to do some research, or work with a financial planner, on the mortgages themselves. As we touched on in our 4 Options for Your First Home Mortgage in DC guide, there are four different terms that you should become familiar with when considering your mortgage options. These terms include:
- Conventional Mortgage
- Adjustable-Rate Mortgage
- Fixed Rate Mortgage
- Federal Housing Administration Mortgage (FHA)
Understanding your long-term interest rate options is an important decision that can impact your monthly payment. Conventional mortgages are the type of mortgage you hear about most often offered by lenders, but there are also options such as the FHA mortgage that is insured by the US Government meant for buyers with lower income that may not qualify for a conventional mortgage.
All of this may seem daunting, but leveraging the right Realtor will have a list of lenders that they’ve established a relationship with that will make finding a mortgage lender much easier; Which brings us to our final point.
Finding the Right Realtor
Lastly and certainly the most important step in buying a house, is finding the right realtor. Realtors help you find your dream home and you want to be sure that they are experts to the area that you’re going to call ‘home’.
Some topics that an expert in the area will be able to provide insight on include:
- Is there a new project getting approved that will increase/decrease the value of the property in the future?
- Is there an increasingly popular neighborhood that hasn’t gained attention yet?
- Do the demographics (median income, avg. home value, avg. age, distance to downtown, school ratings, tax rates, etc.) of the neighborhood fit what you’re looking for?
Here are the two best ways to find a Realtor.
- Do your own research: After some Google searching, see who has the best reviews in your area. Check out their website and see if their values align with your goals
- Referrals: Talk to your network and see who has provided a seamless home buying experience, and who you should probably avoid.
Now, bonus points if you leverage your own research and cross-reference with any referrals that you’ve received from your network in order to make the best decision possible. After all, your Realtor is there to ensure that you have a seamless homebuying process.
Finally, How Much Do I Need to Buy a House?
You can expect to allocate anywhere between 3.5 – 20 percent of your capital as a down payment on the home; **Unless you use a First Time Buyer program, join one of our seminars to learn how you can buy a house for less than $2K out of pocket!
Keep in mind that falling under that 20 percent mark for a down payment will require an additional .58 – 1.86 percent for private mortgage insurance.
Lastly, be sure to account for an additional 2 – 5 percent of the home’s value for closing costs and moving expenses.
Understanding these numbers will greatly help your planning efforts as you determine how much money you need to come up with and whether or not it’s the right time to buy.
Be sure to reach out to The Kree Team for a free homebuyer consultation before moving forward.
Next, it’s time to learn how to select a real estate buyers agent.
