How much money should you have before buying a house?
At some point, any of us may think about buying own home. In this case, the logical question is «How much to save for a house?». And to give an answer to it, we have collected detailed information that will be especially useful for first-time buyers.
At the very beginning, we note that it’s very important to consider all the costs associated with acquiring a home and not just those that directly accompany the purchase process. Let's find out how many savings you actually need to cover all costs of buying a home, including one-time costs and ongoing homeowner expenses.
One-time costs when buying property
One-time costs consist of down payment and closing costs.
The size of a down payment from 3,5% to 20% and depends on the loan type that you get according to your application. Upon receipt of a conventional mortgage ($484 350 or less), the advance payment for a house purchasing is about 20% of the property value. If you can’t make a down payment in such size, you can try to get a loan with a lower one (an FHA loan with 3,5% advance payment) or even without it (a VA, USDA loans with 0% advance payment). But keep in mind, in such cases will increase the cost of borrowing and monthly payments. Also, there are state grants, that real estate buyers can get on certain conditions.
The home buyer must have a down payment in separate savings or current account. If you received money as a gift from one of your family members, it is advisable to leave it in your account for several months.
Closing costs paid when a real estate transaction is closed, are about 2-5% of a home purchase price. Closing costs depend on the rate of the real estate transfer tax or mortgage «stamp», therefore, they differ among different lenders and even for different loans. You will know the exact amount before making a home purchase, so you will have the opportunity to look for options with lower closing costs. Worth mentioning «no closing costs mortgages», but getting it means the increased monthly payment.
If you want to find out how to buy a house with minimal expenses, there are several ways to reduce or eliminate completely closing costs. Firstly, you can arrange with the seller to pay them. Secondly, you can agree on the full payment of the closing costs by your creditor in exchange for paying a higher interest rate on your part.
Ongoing homeowner expenses when purchasing a house
Now let’s take a closer look at what the ongoing homeowner expenses consist of.
One of the key things to know when buying a house is to make a purchase only for your savings or use borrowed funds. If you take a bank loan, there are mortgage payments. These are the most predictable expenses that a home purchase entails. The size of mortgage payments can range from hundreds to thousands of dollars depending on the interest rate and period for which you take a loan. The shorter this period, the higher the monthly mortgage payments. But you can pay the principal faster and save hundreds or thousands of dollars.
Lenders want to be sure that you are able to make these payments in the first few months after buying a house. Therefore, some lenders may require you to confirm that you have the necessary cash reserves after all closing costs are paid. And even if you suddenly could lose your job and stable income, you should have a sufficient amount to make your mortgage payments.
If you have enough of your own funds to buy a home, the financial middleman (bank) is excluded from the transaction process, and mortgage payments are too. Thus, you will save a significant amount of money on interest charges. But you must understand that buying a house without borrowing will significantly reduce your personal savings. Therefore, before making such a decision, really evaluate its possible consequences for yourself.
Also, homeowners have to pay mortgage insurance if their down payments are less than 20%. The annual amount of mortgage insurance can reach 2% of the loan. Insurance amounts are paid every month until the balance of the mortgage debt falls below 80% of the house value. When the principal amount of the debt falls to 78% or lower, monthly payments may be automatically canceled by your lender.
Two other types of expenses that monthly mortgage payment may include in — homeowner’s insurance. The size of each of them varies by state and county since it is formed on the basis of risk factors (earthquakes, floods, etc.) specific to a particular area. Typically, homeowners must prepay the annual insurance policy, plus an extra two months of premium charges. You can reduce these costs by bundling a homeowner’s insurance policy with auto or life insurance policies.
Utilities are an integral part of the total home expenses. Some of these maintenance and repair costs can be planned (for example, installing a security system), while the rest may be occasional (replacing of leaking plumbing, etc). Usually, these expenses don’t exceed a few hundred dollars per year. And note that insurance doesn’t cover this type of costs. Also, utilities can’t be paid by the seller because these are your direct expenses. For such unexpected expenses, we advise you to have annual savings of at least 1% of the house market value.
When calculating how much to spend on a house, such costs as mortgage payments, insurance, and utilities in total reach 10-20% of the property price every year.
Property taxes are another type of home expenses that you will have to pay once or twice a year. Their sizes depend on what state and county the real estate you bought is located in. The exact amount of tax, applicable in a specific region, should be reported to you by a real estate agent. We draw your attention to the fact that this value is not stable. Therefore, don’t be surprised if property taxes increase after a while. The reason for this may be the decision of local governments or an increase in the home’s estimated value.
If you buy a property in a condo with shared spaces, be prepared to pay an additional to the monthly mortgage payment HOA (homeowners association) fees on an annual basis. Their amount is the estimated cost of improving the entire residential complex or common amenities. HOA fees, like utility adjustments, may require adjustments at closing.
According to most experts, the optimal object to buy is a real estate whose regular debt payments (including property taxes and maintenance costs) is equal or less than 43% of your monthly net income. This will allow you not only to pay monthly debts from your budget but also to use the remaining money for achieving other financial goals.
Now you have an understanding of how much money do you need to buy a house. If you’re financially ready, you can purposefully start viewing the real estate lists in order to choose a suitable property. You can do it right now by going to the property catalog on our website.