One of the biggest shocks of buying a home is finding out that you need way more cash to close on a house than just a down payment. It’s hard enough to save for the down payment on your home, only to find out that you need more – often a lot more – in order to complete the transaction.
What can you afford?
Begin your budget by figuring out how much you (and your partner or co-buyer, if applicable) earn each month. Include all revenue streams, from alimony and investment profits to rental earnings. You don’t want to wind up with a mortgage you can’t pay, so it’s important to be realistic about your monthly income and expected expenses, and to leave some breathing room in your budget for emergencies or unexpected costs that can crop up.
It varies. With most lenders, if you want to avoid paying additional private mortgage insurance (PMI), you’re looking at a 20% down payment. But coming up with 20% may be difficult for many first-time buyers, so mortgage lenders have options with down payments of 10%, 5%, or if you qualify for special FHA loans or VA mortgage loans as little as 3.5%.
This is where things start to get a little complicated. This is because the cash outlay to make the purchase becomes (often) much higher than the down payment alone. On a $200,000 mortgage, you’ll need to come up with between $4,000 and $6,000 in addition to your down payment.
Closing costs vary from one state to another. This is due to differences in either the real estate transfer tax, or mortgage “stamps” (government taxes collected based on a percentage of your mortgage loan amount). They can also vary based on different rates charged for appraisals, attorneys, and even title insurance.
Once you’ve sealed the deal and the home is yours, the next step is moving your stuff from your old home to your new. While you may be anticipating a move, the cost may take you by surprise and is an expense not to forget when buying a home.
You’ll need basics like electricity and running water at your new home, and you may want extras like cable TV or Internet service. Don’t forget these costs when buying a home.
Stewart, with Keller Williams Capital Properties, says homebuyers should be aware that they may have to pay deposits for utilities if they’re establishing services for the first time. If you have poor credit, some companies may require a larger deposit, so plan ahead for these unexpected homebuying expenses.
How much do you need to save?
So you’re wondering, How much money do I need to buy a house? That’s a smart question to ask, especially since buying a house can come with a lot of hidden expenses that are easy to overlook until closing day.
If you’re getting a mortgage, a smart way to buy a house is to save up at least 25% of its sale price in cash to cover a down payment, closing costs and moving fees. So if you buy a home for $250,000, you might pay more than $60,000 to cover all of the different buying expenses.
One of the easiest ways to calculate your homebuying budget is the 28% rule, which dictates that your mortgage shouldn’t be more than 28% of your gross income each month. The Federal Housing Administration (FHA) is a bit more generous, allowing consumers to spend as much as 31% of their gross income on a mortgage. But don’t forget that if you have other debts, you must consider them in addition to the mortgage payment to determine how much you can truly afford.