How Much Money Do You Need To Buy A House? A Full Cost Breakdown

It’s no surprise that buying a home is an expensive process. But there can be a lot of confusion about all of the costs you might need to pay upfront. If you are wondering how much money you need to buy a house, keep reading to learn more..

How Much Do You Need To Buy A House? Upfront Costs To Be Aware Of

The amount of money needed to buy a house depends on a variety of costs. 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 pay up front to close the sale. Traditionally, down payments are 20% of the purchase price. While putting that much down results in a better interest rate, no private mortgage insurance (PMI) and a lower monthly mortgage payment, the truth is, you don’t need to put that much money down on your home. Many loans are currently available with down payments as low as 3%. In fact, it’s possible to buy a home with 0% down if you meet certain qualifications.

Here are the minimum down payment requirements by mortgage type:

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 in closing costs.

The most expensive closing cost is likely funding your escrow account, which could be up to 2% of what you pay for your house. The escrow 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. This is nice because you don’t have to worry about paying these when they are due; they are taken care of with the money you have in escrow.

Though many closing costs are applicable regardless of mortgage type, FHA, VA and USDA loans each also have specific fees. FHA borrowers will need to pay 1.75% of their loan amount in upfront mortgage insurance, VA loan holders will likely pay a VA funding fee (which varies by loan type and down payment) 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 may need to have up to 18 months 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 throughout the life of your loan. However, it does mean you have to have quite a bit more money than you’re even putting down on your house.

Other 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 average cost for a home inspection is from $200 to $500.
• Home appraisal fee: The average cost for a home appraisal is from $600 to $2,000
• Credit report fee: Lenders may charge a $30 – $50 credit report fee to obtain your credit score.
• Title fee: Having a title search done typically costs $75 – $200.
• Application fee: Many lenders charge 1% of your loan amount to process your loan application, but this cost can vary.
• Moving company fees: Moving can be a big expense. Movers can charge $800 – $1,600 for a local move and $2,200 – $8,000 for a long-distance move.

Recurring Costs After You Buy A House

Once you are done buying a house, the expenses don’t stop coming in. Below are some common recurring costs to budget for, in addition to your new mortgage.

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% home equity, the expense will end. Assuming you borrowed $240,000, you’ll pay $240 – $4,800 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 $1,428 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 varies 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, in the escrow.

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, just in case.

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 $430 per month to cover these expenses. It’s important to keep utility costs in mind when calculating how much home you can afford.

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.

It is also common for HOAs to have move-in fees or property transfer fees or require the prepayment of certain fees upon the sale of the home.

Calculating How Much Money You Need To Buy A House

The Bottom Line

Buying a house is expensive. Even beyond the mortgage principal and interest payments, there are a ton of other fees and costs to budget for. As you plan to buy a home, it is important to do research and speak to professionals about the different loan types available to you - and the costs associated with each.