How Much Money Do I Need to Buy a Home?

Find out how much money you really need to buy a home.

First time home buyers need to know two key numbers when they go to buy a home. The first number is their total monthly cost of owning a home, which is covered in "How Much Does it Really Cost to Own a Home. The second number is the total amount of cash required to buy their home.

Most first time home buyers understand that they will need to make some type of down payment to buy their home. But many first time home buyers are surprised to learn that there are additional funds needed for closing costs and additional expenses of completing a real estate transaction.

Your Down Payment Mortgage lenders require that borrowers make some type of down payment. While the days of zero down payments are gone except for a few exceptions for veterans and rural properties, there are many low down payment options available for first time home buyers. So the first factor that determines how much cash you will need to buy your home is the total amount of your down payment. Down payments are usually expressed as percentage of the sales price, so home buyers should keep in mind their anticipated down payment and how it will increase as they make higher offers on homes when shopping.

Closing Costs Closing costs are often a big mystery to first time home buyers. Usually, home buyers are told by Realtors and loan officers what their required down payment will be and that they should also budget an extra 3% to 5% of the purchase price for closing costs. For home buyers who are only putting down 3% to 5% of the purchase price as a down payment, closing costs are actually doubling the amount of money they need to buy a home.

Home buyers can take control of closing costs and cut the amount of cash they need at closing in two ways. First, by following four simple steps, home buyers can lower their closing costs. Second, home buyers can have the seller pay for some or all of their closing costs using seller concessions. By working to cut the total amount of closing costs and taking advantage of the current buyer's market to have the seller pay some or all of these costs, home buyers can reduce the cash they need at closing substantially.

Other Costs Of Buying A Home

Home buyers should be aware that there are a few other costs of buying, such as the cost of a home inspection. Inspections can run from a few hundred dollars to nearly two thousand dollars depending on the types of testing done and the size of the house. For example, homes with wells and septic systems often need to have those systems tested and these tests are often a couple hundred dollars each depending on where you are located.

Finally, home buyers are often required to have post-closing payment reserves - usually two to three months worth. Post-closing payment reserves equals the total amount of funds that a home buyer has after their loan has closed. For example, if your monthly housing payment will be $1,500 per month and you have $4,500 per month left over after paying your down payment and closing costs, you have $4,500 / $1,500 = 3 months of payment reserves.

Home buyers do not need to do anything with these payment reserves - just have them available. Mortgage lenders will allow home buyers to use retirement funds as reserves but they will only credit 70% of the value of those funds toward reserves. For example, if you have $10,000 in a 401k, you can use $7,000 to count as payment reserves even though you actually have $10,000. This deduction accounts for the tax penalties of early withdrawals.

While lenders have a minimum payment reserve requirement, home buyers be warned: all home owners know that you end up needing way more money than you thought when you own a home, so the more cash you have after closing the better you will be able to handle the costs of home ownership.

For an exact mortgage rate quote and a free purchase mortgage pre-approval using gift funds, please email us or call us at 1-877-868-2503.

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If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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