Are you planning on buying a house? Is it your first? You likely have many questions about the entire process, but the biggest may be how much money do I need to buy a house? There are many costs to consider when calculating how much money you need to buy a house beyond just the down payment–though that is a huge factor. In this article, we’ll cover each different cost.
How Much Money Do you Need to Buy a House?
The down payment is the cost that most home buyers are familiar with, so let’s cover that first. Down payments are generally represented as a percentage of the home price. Different lenders and loan programs require different percentages of down payment, so it’s important to know what’s required of you before you start hunting for homes. VA loans do not require any down payment at all (though you’re welcome to pay one anyways). USDA loans offer the same perk, but FHA loans require anything above 3.5 percent. Conventional loans require the highest down payment with a minimum of 5 to 10 percent.
|Loan Program||Percent Down Payment||Minimum Down Payment on a $200,000 Home|
|Conventional||5% – 10%||$10,000 – $20,000|
Note that these costs are the absolute minimum you would have to pay for each loan. There are many benefits to paying more than you are required to. On a conventional loan, for example, private mortgage insurance (PMI) can be waived after a borrower has built up 20 percent equity in their home. If you start out paying a 20 percent down payment, that means you will avoid paying private mortgage insurance altogether right from the start. In the example above of buying a $200,000 home, 20 percent would amount to $40,000. (You do not have the option of waiving PMI on an FHA loan, no matter how much equity you have.)
And in some situations, paying a larger down payment may prevent you from being denied a loan. Why? Because a larger down payment means there is less risk that the borrower will default on their loan.
For many home buyers, saving up that huge chunk of money to pay all at once can be a difficult, if not seemingly impossible, endeavor. That’s why it’s so important to find the right loan program for your situation.
The buyer of the home must compensate the seller for any utility charges the seller paid in advance for the time the buyer would be in the home. An example to illustrate this would be if the seller paid the water and trash bills for March, but the buyer moved in just a week into the month. In that scenario, the buyer could be asked to repay the seller a portion of the utility bill upon closing. Utility repayments are usually quite small, if they are required at all.
Closing costs cover many fees that are incurred in order for you to complete the purchase process. Usually, closing costs amount to around 2 to 3 percent of the total loan amount. Depending on the type of loan you’re doing, this could amount to even more than what you pay in down payment.
Here are a few common closing costs you may have to pay:
- Processing fee
- Origination fee
- Discount points
- Appraisal fee
- Attorney fees
- Insurance costs
- Surveying fees
Fees vary a lot between lenders and states, so it’s important to stay in good communication with your lender about all of the required fees. For VA mortgages, the Department of Veterans Affairs prevents veterans from paying many of the fees that would be charged on a conventional loan. This is just one perk that makes VA loans a much more affordable option than other loan programs.
Prepaid Expenses / Escrow
Prepaid expenses on a mortgage can be a little confusing for some borrowers, but they are necessary to ensure the borrower can keep up with the first few (very crucial) payments. What we’re mostly talking about here is the escrow. The escrow fee is generally lumped together with the closing costs, but it’s important to know what this fee is doing by itself.
Funds are put into an escrow account when you buy a home, and these funds are used to pay homeowner’s insurance and real-estate taxes when they come due. Depending on how frequently these charges must be paid, the lender may require you to put anywhere from 2 to 12 months’ worth of payments into your escrow account. With a 20 percent or large down payment, you can sometimes alter or altogether decline whatever escrow plan your lender has come up with. (As with all expenses, however, be sure to speak with your lender about whether this option is available.)
How Much Money Do I Need to Purchase a House?
Many first-time home buyers will ask, how much money do I need to buy a house? As you can see, the money you need to have in hand by the time you close includes much more than just the down payment. As said above, different loan programs will have different requirements for how much you pay at closing. For veterans financing their homes with a VA loan, you could potentially walk away from closing without having paid a dime. For some conventional borrowers, you could pay as much as $51,000 at closing on a $200,000 home, depending on how much you put into your down payment.
Of course, if you’re asking how much you would pay for a home over the entire life of a loan, then that would take into account many other factors that you can read about in other articles on our blog.
Benefits of Buying a Home
After learning what you need to save up in order to buy a home, you may feel less enthusiastic about getting into your first home. Many critics of home ownership claim that renting is cheaper than buying. Although this may be true in the short term, there are many benefits to home ownership that make the whole process worth your time and money in the long term.
First of all, buying a home and paying your mortgage each month allows you to build equity, meaning you personally own more and more of your house. When you’ve finally paid your loan in full, that house is completely yours and will be until you decide to sell it. While renting, you are not investing in something that will last you a lifetime. At a very simplified level, the money you pay to your landlord each month goes into their pocket as a trade for someplace for you and your family to live for another month. Renting is perfect for providing you with enough time to build up enough money to pay for a home and renting has its own benefits. However, when you are able to purchase your own home, you should seriously consider taking that step and becoming the true master of your home and property.
Here are a few additional advantages of owning a home:
- You get to design and make changes to your home however you like without asking permission from your lender.
- Significant tax deductions come with a house.
- Owning a home will build strong credit.
If you are a veteran of the military and are a 1st time home buyer, you should apply for a VA home loan in order to receive all of the VA home benefits you’re entitled to – including no down payments, low interest rates, and more. To apply now, give Low VA Rates a call at 855-223-0705.