«How much money should I save before buying a house?» The big question that’s on everyone’s minds and lips lately.
If buying a home is on your bucket list, you may have asked yourself and pretty much everyone you know who just bought one.
However, you might not realize that even they might not give you an accurate estimate! Whenever you have a real estate-related question, it is best to seek assistance from a real estate professional with deep expertise and experience. Let’s look at how much salary is required to buy a house.
In 2022, housing prices are rising, and homes are becoming more expensive to purchase in many areas. Despite this fact, many would argue that buying a home is still the most responsible financial decision regarding owning a home.
Mortgages will indeed be more expensive in 2022 and those prices will only continue to increase throughout the years. However, if you want to buy your dream house, here’s what you need to do.
How much money do you need to buy a house?
1. Your Debt-to-Income Ratio
The first and most apparent decision point is your financial situation.
It’s a good idea to consider how much money you’re currently making, if you have another primary income source or if you’d be looking to supplement it with this new endeavor.
Several things matter when calculating affordability, even if that isn’t the case, and you would be using all of your current earnings to purchase the home. Those things include property taxes, maintenance fees, and insurance premiums that might behoove you to consider before finalizing any agreements.
The 43% Debt-to-Income ratio is a standard that determines if you can make your payments each month. It considers the level of affordability and financial stability you can provide during a loan or mortgage application.
FHA suggests that Borrowers’ annual income should be at least two times the gross debt obligation. This can include housing-related expenses like homeowners’ insurance, property tax, and association fees.
So, to answer the question, «How much money do I need before buying a house» start here.
2. Your Down Payment
The down payment is a significant one. It could determine whether you are ready to purchase the home or not. It’s a little complicated, but we will try our best to simplify it for you.
Depending on what type of loan you get and your credit score, you can pay less than you might think upfront to get a less expensive loan at a lower interest rate.
For example, FHA buyers have to put down at least three-point five percent (3.5%), but if your credit score is less than five hundred eighty (580), it’s going to cost you ten percent (10%) to buy the home unless you want to pay for PMI in which case you’ll need twenty percent (20%) down.
So starting with the lower percentage of three-point five percent is possible if your credit is at least a 500. Then, instead of costing 10% more for putting 10% down, it will not cost anything more.
Your down payment will ultimately affect how much pre-tax income you need because it will increase or decrease the amount of money you must borrow. Depending on your loan program, you may have to make a minimum down payment based on the home’s sale price.
Therefore, on a scale of 1 to 10. What is your confidence level you can handle the salary needed to buy a house now? Is it high? But wait…! The story doesn’t end there!
[Related Article: How to Buy a House in Massachusetts with Bad Credit]
3. Upfront Costs
A third factor in determining how much money you need to buy a house is prepaid costs and your down payment.
Prepaid money does not cover any expenses during or leading up to the actual buying process, like conveyancing or legal fees – as these are considered «closing costs» and therefore part of your actual mortgage payment.
Upfront prepayments are meant to cover services such as your property insurance premiums, real estate taxes, and mortgage insurance in case you fall behind on making those payments in the future.
These monthly recurring payments make it, so the homeowner doesn’t have drop-dead amounts of cash at hand whenever the due dates for these bills come by.
There is also a mortgage per diem charge, or daily mortgage interest, included in prepaid costs.
The per diem rate is based on the closing date in the mortgage industry. This covers the mortgage interest accrued from the closing date through the last day of the month in most cases.
A homeowner only has to pay interest in advance when they incur per diem charges. Other times, customers pay their bills in arrears.
4. Closing Costs
There are a lot of different costs involved when you get a mortgage. In recent years, some of the largest ones have been the appraisal fee, credit report fee, origination fee, application fee, title search fee, title insurance policy, and underwriting fee.
The amount you pay can be as high as 2% to 5%, depending on what is being charged.
The average borrower paid $6,087 in closing costs and fees in 2020. While that figure might seem significant at first glance, there are also many ways to cut down on closing costs, such as getting a loan with your friend or family member or shopping for a good deal on mortgages online.
Closing your loan can be offset by the seller’s payment of your «closing costs.» These charges cover the paperwork, title search, and other expenses to get you a mortgage.
Note: not all sellers pay closing costs, so make sure it’s part of any written purchase agreement. Also, consider what will happen if you don’t have enough cash to pay for the closing fees – some lenders may allow you to roll them into your principal, but doing so will add to your monthly payments over time because you’ll have borrowed more to buy the home.
5. Your Monthly Mortgage Payments
Your monthly mortgage payment is a complex undertaking—and perhaps one of your most important financial transactions. Don’t let it be a blind spot.
You can use a mortgage calculator to figure out how much you will owe each month—for example, if you borrow $240,000 and finance it with a 30-year fixed-rate mortgage at 3 percent, that would amount to around $1,011 in monthly principal and interest.
When taking out a mortgage, you need to consider that it won’t be your last payment. If you put less than 20% down, you’ll have to pay a mortgage insurance premium.
Mortgage insurance is a type of protection for the lender if you can ever no longer afford to make the payments on your home and are forced to sell it for below market value.
If you’re under 20% equity ownership, you’ll also need private mortgage insurance (PMI) until your equity reaches at least 20% of the property’s value.
Even though the price of PMI may vary depending on factors such as a borrower’s creditworthiness and income level, on average, they will pay approximately $30 more per month for this type of protection.
When looking at the long-term costs of homeownership, be sure to include homeowners’ insurance, property taxes, if your property belongs to a homeowner’s association, and regular maintenance costs.
As a homeowner, you will have to pay yearly fees, so remember to factor that into your budget.
Are you buying a home? Make it fit your budget.
After you are out of debt and have an emergency amount saved, the next thing to do is a bit of math to determine how much money you need to buy a house.
When you seek financing, always make sure your housing payment doesn’t exceed a quarter of your take-home pay, or else you’ll have a mortgage problem!
You might want to use our handy Mortgage Calculator not to spend too much when you’re finally ready to start looking at homes online.