How Much Money Do You Need To Buy A House?

After years of renting, you might finally feel ready to buy a house. When it comes to renting versus buying, though, there are some significant costs to consider. So how much money do you need to buy a house?

To help you prepare, we’ve broken down the upfront and recurring costs of buying a home, as well as how to prepare yourself for these expenses.

How Much Do You Need To Buy A House?: Upfront Costs

Buying a house can cost you some serious money upfront. These expenses involve significantly more than just your mortgage payment, too. Let’s take a closer look at how much money you’ll need to save up for the different upfront costs associated with a home purchase, and help you decide if you should buy a home now or wait.

Down Payment

A down payment is a percentage of the home’s purchase price you make upfront to close the sale. Traditionally, your down payment should be at least 20%. While putting that much down can result in a better interest rate, help you avoid paying private mortgage insurance and get you a lower monthly mortgage payment, the truth is, you don’t need to come up with that much money. In fact, it’s possible to buy a home with 0% down.

Here are the minimum down payment requirements by mortgage type:

Of course, each type of loan has specific eligibility criteria you’d have to meet to qualify. For instance, VA mortgages are only available to active military members, veterans and, in some cases, their spouses. You’ll have to learn about each type of mortgage to see which best fits your situation.

Closing Costs

After your down payment, your closing costs will be the next biggest hit to your wallet. These costs vary by state, mortgage lender and loan, and cover expenses associated with finalizing your real estate transaction. In general, you can expect to pay 3% – 6% of the home price.

The most expensive closing cost is likely funding your escrow account, which could be up to 2% of what you pay for your house. This account is opened by your lender and will be used to pay your homeowners insurance, property taxes and mortgage insurance (if applicable) on your behalf. While your monthly mortgage payment will include these costs on an ongoing basis, your state may require you to prepay a certain number of months in advance.

Though many closing costs are applicable regardless of mortgage type, FHA, VA and USDA loans have specific fees. FHA borrowers will need to pay 1.75% of their loan amount in mortgage insurance upfront, VA loan holders will likely pay a funding fee based on how much money they put down and USDA mortgagors will pay 1% of their borrowed amount as a guarantee fee.

You may be able to convince the seller to cover some of your closing costs (the maximum amount allowed is based on mortgage type). There are also programs designed to help first-time home buyers cover this expense. If neither applies to your situation, some lenders might allow you to roll your closing costs into your loan. While this frees up cash flow now, your monthly payment will be higher, and you’ll pay interest on the additional amount, increasing your overall cost to borrow.

Cash Reserves

Your lender wants to be sure that you can repay the loan in full after you buy your home. So, in order to protect their investment, they may require you to have cash reserves in the bank after closing – expressed as a certain number of extra monthly mortgage payments.

The requirement could be as few as 2 months to as many as 12, if you’re self-employed. If you’re taking out a jumbo loan, you will need to have 12 months’ worth of extra mortgage payments in the bank. Having sufficient cash reserves from the start decreases your likelihood of defaulting on your mortgage. Plus, it can provide you financial comfort.

Other One-Time Fees And Expenses

Although the big expenses have already been covered, you’ll still need to pay several other one-time fees when buying a house. Some of these fees include:

• Home inspection fee: The cost to have a home inspection done can be $300 – $500.
• Home appraisal fee: A home appraisal can  cost $600 – $2,000.
• Credit report fee: Lenders may charge a $20 – $30 credit report fee to obtain your credit score.
• Title fee: Having a title search done typically costs $75 – $100.
• Application fee: Some lenders charge up to $500 to process your loan application, but this cost can vary.
• Moving company fees: A long-distance move can cost up to $5,000.

Some of these costs can be either charged upfront or rolled into your closing costs.

How Much Money To Buy A House?: Recurring Costs

In order to properly enjoy your home and keep your finances in good shape, you’ll need to budget for several recurring expenses associated with buying a house.

Of course, there’s your actual mortgage payment, which includes principal and interest based on the amount you borrowed, your loan term, and your interest rate. Below are some of the other costs you may be paying for the length of your loan and beyond.

Mortgage Insurance

If you have a conventional mortgage, and you don’t put 20% down, you’ll pay 0.1% – 2% of your loan amount each year in private mortgage insurance (PMI). The good news is that once you’ve built up 20% equity in your home, the expense will end. Assuming you borrowed $240,000, you’ll pay $1,200 – $2,400 annually.

However, if you have an FHA loan, you’ll likely have to pay mortgage insurance for the life of the loan to the tune of 0.45% – 1.05% of your borrowed amount every year. Assuming a $240,000 initial loan, you’ll pay $1,080 – $2,520 annually.

Homeowners Insurance

Based on policy terms, your homeowners insurance will repair or replace your home and its contents if you experience qualifying damage or theft. The average homeowners insurance premium is $1,200 per year. However, your rate could vary depending on the location of your home, its condition, your credit score, your deductible and other factors.

Property Taxes

Property taxes are collected to pay for essential services in your community (think first responders, road repair, public schools, etc.). The cost of your property taxes can vary dramatically based on where your property is located and the assessed value of your home. Your local government is responsible for setting the tax rate and can increase it at any time. To give you a ballpark idea, expect to pay about $1 per $1,000 of your home’s value each month. That means a $300,000 home would run you $300 per month, or $3,600 annually.

Chances are your monthly mortgage payment will include your property taxes, as well as your mortgage and homeowners insurance.

Maintenance, Repairs and Upkeep

Keeping your home in good condition means you’ll need to pay for routine maintenance and required repairs throughout your homeownership. A good rule of thumb is to set aside 1% – 3% of your home’s value each year to cover any work that your house needs. So, for a home worth $300,000, be sure to have $1,000 – $3,000 on hand.

Utilities

Owning a home means being responsible for all of the utilities, too. You’ll have to cover the electricity, heating and water bills each month. While utility rates vary based on utility type and service provider, the average homeowner in America spends roughly $270 per month to cover these expenses.

Homeowners Association (HOA) Fees

Is your property under a homeowners association (HOA)? If so, you’ll need to pay fees as a member. These fees cover community amenities and common area maintenance. The average homeowner of a single-family residence within an HOA ends up paying $200 – $300 per month.

Calculating How Much You Need To Buy A House

For an idea of how much cash you need to buy a house, let’s take a look at an example.

Say you buy a $300,000 home with a 30-year fixed mortgage at 6.5% interest. You put 20% down. This is roughly what it would cost you to move into your new home:

After adding these costs up, you could be looking at $74,034 – $86,034 in total upfront costs.

Of course, there are lots of variables at play here. Your situation may look completely different depending on the cost of your home and what type of mortgage you take out. It’s just important for you to understand all of the potential costs involved in a real estate transaction.

Are You Prepared To Buy A Home?

Feeling ready for homeownership isn’t always the same as actually being ready. Take these steps to prepare to buy a home and be as financially ready as possible.

Watch Your Credit

Mortgage lenders pull your credit report to determine your creditworthiness, which can affect your mortgage rates. Check your score often to make sure you’re maintaining healthy credit. If you find your score is low, take steps to get your credit mortgage-ready.

Make A Budget

Once you figure out how much house you can afford, you should establish a new monthly budget that accounts for your estimated mortgage payment. Determine an income percentage that can go toward your monthly payment while still being able to afford other living expenses – experts recommend 28% or less.

Pay Off Other Debts

If you have multiple outstanding debts, it can be beneficial to pay them off before buying a house. This will free up more of your income you can put toward your mortgage and other recurring payments.

Save Up For A Down Payment

If you can afford to set money aside every month, saving up for a down payment can go a long way toward giving you the cash you need to buy a house. You can avoid mortgage insurance if you make a down payment of at least 20%, saving you a bit of money in recurring expenses.

Compare Different Lenders

Different lenders may offer different rates and terms. Choosing the right lender may take some shopping around and comparing offers before you find the best deal. Once you’ve shopped around and determined your estimated rates, go with the lender with the best deal and that’s the best fit.

FAQs About Money Needed For A House

A house is a big purchase to prepare for, and there’s a lot to consider when it comes to your financial situation. As such, you may still have some questions about how much money you really need to buy a house. Here’s what other people are asking, and our answers for them.

How much money should I have before buying a house?

This can depend on the price of the home you want to buy and the type of loan you’re borrowing. A down payment could be 3% – 20% of the purchase price, and closing costs 3% – 6%. If your lender requires cash reserves, that’s 2 – 12 months of mortgage payments to save up. Consider the price range you plan to shop in and your loan options to know how much you should save before buying.

What’s the least I can put down on a house?

This will typically depend on the type of mortgage you’re borrowing. Some conventional loans allow down payments as low as 3%, and FHA loans require a minimum of 3.5% down. If you qualify for VA or USDA loans, there may be no down payment at all.

How can a single person afford a house?

Buying a house by yourself can be challenging on a single income. If you determine what you can afford, create a working savings plan and keep your credit strong, owning a home for yourself is very possible. It can also benefit you to explore low-down-payment loan options like FHA loans.

The Bottom Line

How much money you need to buy a house depends on your situation. Based on the route you take, you may need a lot of funds to close the deal. So, as you plan for your home purchase, be sure to account for both upfront and recurring costs, and do your homework to determine which type of mortgage works best for your situation. The type of loan you take out can play a huge factor in how much cash you need at closing and each month thereafter.

Curious about what you currently qualify for? Start the approval process today and see your estimated mortgage rates.