Preparing to Buy

How much money should I have saved to buy a house?

You will need enough funds to cover your down payment, inspections and closing costs, but how much extra money should you have saved?

It is wise to have six months’ worth of living expenses saved up in case of an emergency. Should you lose your job unexpectedly the week after closing on your new house, or you experience an injury and can’t work for several months,it is smart to have several months of emergency cash saved up in a liquid account.

Even if your new home is “move-in ready” you will want to have more than your down payment saved so you can settle into your new home. For example, you may want to purchase new furniture (when you find your old set doesn’t look quite right) or new appliances, or a lawn mower for your newfound lawn, etc.

There is nothing worse than feeling like you can’t go out to eateat or enjoy fun outings because making your mortgage payments each month requires you to save all your money.

Set yourself up for joy and excitement instead of stress and worry. Have plenty of emergency and back-up funds so you can enjoy your new home!

How much down payment do I need?

In today’s market you can put down anywhere from $1,000 down to 20% of the purchase price, or more.

There are some down payment assistance programs that will loan or gift you the down payment and/or funds for closing costs. If you qualify, you could put as little as $1,000 down. The average first-time homebuyer puts down 3 to 3.5% of the purchase price.

If you put down 20% you do not have to pay mortgage insurance, which can cost over $200 extra per month on your mortgage payment.

Payment example:

• Purchase price $300,000
• FHA loan 3.5% down ($10,500) at an interest rate of 4.125% with mortgage insurance, taxes and insurance = monthly loan payment of $1,881
• Conventional loan 3% down ($9,000) at an interest rate of 4.5% with mortgage insurance, taxes and insurance = monthly loan payment of $1,667.60
• *These estimates are based on borrower credit score above 740 and include estimated insurance of $100 per month and taxes of $150 per month.

How much money do I need out of pocket prior to closing?

Earnest money:

• The average for a first-time buyer is $1,000 to $4,000 or 1-2% of the purchase price. This is due within 24-48 hours of going under contract. Typically, earnest money is paid in the form of certified funds or a cashier’s check. The check is cashed, and the funds are held at the title company or in a Real Estate escrow account until closing. Earnest money is added to the total amount you need to bring for your down payment at closing.

Payment for Inspections:

• General Inspection: $200-400.
• Radon Test: $100-150.
• Sewer Scope: $100-170.
• Additional inspections are available, but are less common, such as an evaluation by a Structural Engineer.

Remaining funds are due at closing. If the seller has not contractually agreed to pay your closing costs, you will be responsible for them at closing, approximately $4,000-6,000.

Get prequalified with a lender

Prior to viewing homes, you will need to get prequalified for your financing. You can work with your bank or credit union or speak to a reputable mortgage broker. They will review your financial information such as your credit, income and debt obligations, and put it into their formula to calculate how much debt you can support in a mortgage.

Top five reasons to get prequalified prior to looking at houses:

1. It shows to sellers that you are a serious buyer
2. In the current market, homes sell fast! You will want to have your financing in place so you can submit an offer the day you find your new house.
3. To know how much, you can afford. You don’t want to find your dream house and then find out you can’t afford it. This helps to avoid a serious heartbreak!
4. Some houses and condos on the market today do not qualify for purchase with all types of financing. For example, due to the property’s condition (broken windows, peeling paint, etc.) some homes cannot be purchased with an FHA loan. For condos there are even more restrictions for what type of loan can be used. It is better to know what type of loan you qualify for, and then find a house or condo that fits your loan type.
5. If you need to ask the seller for closing costs, it’s better to know that when you are looking for a house. Some sellers say outright that they won’t contribute to the buyer’s closing costs.