For many, one of the hurdles in home buying is getting finances together to cover the initial cost of homeownership. Even loans with little or no down payment require money – often a lot more than you expected – to complete the sale.
Saving money can take a while but if you’ve saved early and did it wisely, this wouldn’t be a huge road block. Here are some tips on how to save for a down payment which you will find helpful.
How Much Money Should You Have Before Buying a House?
The amount of money you should have to buy a house depends on a number of factors, but mainly the price of the house you want to buy and the type of loan you’ll acquire.
If you want to avoid paying PMI (an insurance that protects the lender in case you default) on top of your monthly mortgage payments you’ll go for a 20 percent down payment. That is paying a down payment of $30,000 on a $150,000 home.
But if coming up with a 20 percent down payment is not possible in your current financial situation, lenders have options for as little as 3.5 percent or no down payment if you qualify for FHA, USDA or VA mortgage loans. See what right type of mortgage is for you.
Home inspection is part of the home buying process and it is always, unless there’s a provision in the contract, at the buyer’s expense. Home inspection fees range from $300 – $500 depending on the property’s location, the size, and other additional evaluations.
The closing costs are fees charged by your lender and other parties involved in the real estate transaction. These include title services, recording fees, buyer’s attorney, appraisal fee, survey fee, mortgage processing fee. Most experts recommend budgeting 2-5 percent of your total purchase price. That is allotting somewhere between $3,000 and $7,500 on a $150,000 home in addition to your down payment. You can reduce or completely eliminate your closing costs if you negotiate for the seller to pay your closing costs.
You will be required to reimburse the seller if in case the seller has prepaid utilities such as water, sewer, or trash removal. The same goes for homeowners association fees if the property is located in a neighborhood with HOA.
Prepaid expenses may come to more or less 2 percent of the loan amount depending on where you live. These pre-paid expenses confuse many home buyers if not explained prior to the closing table. With most mortgages, your lender will escrow for real estate taxes and homeowners insurance. That means paying them certain amounts upfront to ensure that the funds are available to make payments when they are due.
Your lender may escrow anywhere between 2-12 months of real estate tax. If the taxes on a $150,000 home are $85 per month and you are required a year of property taxes, you will prepay $1020 at closing. The same goes with homeowners insurance. Typically, you’ll have to prepay for one-year of homeowners insurance. The average annual cost of homeowner’s insurance in South Carolina was $1,124.
Cash reserve is not necessary an upfront fee but your lender will require you to have a cash reserve left in your savings after all closing costs are paid. By adding a cash reserve stipulation of the loan, the lender is ensured that you are still able to make payment in the first few months of the loan. Cash reserve is often based on your monthly mortgage obligation. Typically, lenders require 2-6 months of cash reserve. So if your principal, interest, taxes, and insurance on $150,000 home come to $926 per month, the reserve requirement will be between $1,852 and $5,556.
Estimating the Amount of Cash You Need To Buy a 150K Home
$150,000 home with a 4% interest rate on a 30-year fixed-rate mortgage:
|CATEGORY||LOW ESTIMATE||HIGH ESTIMATE|
|Down Payment||$5,250 (3.5%)||$30,000 (20% )|
As you can see in the example, you will need between .5 and 1.5 times your down payment in cash to successfully close on a house. Needless to say, it is important to prepare your budget for these expenses in your home buying plans. See Tips on Preparing Your Budget for Homeownership.
Other Costs to Consider
Moving Cost and Other Homeownership Costs
Moving into a home can involve a lot of expenses: packing, storing your belongings, and hiring a moving company. These expenses will incur immediately after taking possession of the house. Be sure you’ve budget for it on top of your cash reserve.
Setting aside budget for setting up utilities, new things for your new home or home maintenance is a wise move.
It is also sensible to have your emergency fund still intact after all the costs of buying a house. It’s always good to be financially prepared in the event such as losing a job, debilitating illness or a major expense happen in your life.
Buying a home is likely to be the largest purchase you will ever make in your life so it’s important to be prepared. Make sure you can afford a housing loan and still meet your other financial obligations. Starting a savings plan and reducing your debts are some of the good steps to prepare for home ownership.
Free Mortgage Guide
If you are buying a home or anyone you know who is thinking of buying a home, use this Home Loan Toolkit to help you understand and help you get the best mortgage specific for your situation. This guide will also help you understand the mortgage process and overview of the total costs of homeownership.