“How much money should I save before buying a house?” Unraveling the question that’s on everyone’s mind.
If purchasing a home is on your wish list, chances are you’ve asked yourself—and just about anyone who recently became a homeowner—this burning question.
However, what you may not realize is that even they might struggle to give you an accurate answer!
When it comes to real estate queries, it’s always best to turn to a knowledgeable and experienced real estate professional for guidance. Let’s explore how much money you need to save to make your dream of homeownership a reality.
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 key factor when buying a home, and we can help you better understand it. In addition, different loan options can make this process easier, such as FHA, conventional, and USDA loans. The best thing is that there are also down payment assistance programs.
We know that the down payment is a significant part of considering the purchase of a home. This is because it determines your ability to acquire it. However, you don’t have to worry as we are here to find the best solution for you.
Depending on the type of loan you choose and your credit history, you may be able to put down less than you think.
For example, buyers who opt for an FHA loan typically make a down payment of at least 3.5%. And buyers who decide to go for the conventional loan need a 5% down payment. For people with ITIN, the down payments are usually 20%. And USDA loans require no down payment.
It’s important to note that the down payment you choose will affect how much pre-tax income you’ll need. This is because it will determine the amount of money you should borrow. You should also know that the less down payment you use, the higher the total cost of the house will be at the end of the 30-year term.
Also, remember that access to these loans is determined by your credit score.
If you would like to learn more about the down payment assistance programs available now, we invite you to contact us. We are here to help you discover the options that fit your situation.
[Related Article: How to Buy a House in Massachusetts with Bad Credit]
3. Upfront Costs
Another crucial factor in determining the amount of money needed to buy a house lies in the realm of upfront costs. These costs encompass both prepaid expenses and your down payment, each playing a vital role in the home-buying process.
Prepaid expenses are distinct from closing costs, which include conveyancing fees and legal expenses associated with finalizing the purchase. Instead, upfront prepayments cover essential services such as property insurance premiums, real estate taxes, and mortgage insurance to safeguard against potential payment delinquencies.
By incorporating these recurring payments into your overall expenses, you can avoid the need to have substantial sums readily available on each due date.
Additionally, prepaid costs often include a mortgage per diem charge, which accounts for daily mortgage interest. This charge is calculated based on the closing date and typically covers the interest accrued from the closing date until the last day of the month.
It’s important to note that homeowners only pay interest in advance when per diem charges apply, while in other cases, bills are settled in arrears.
4. Closing Costs
There are many different costs involved when you get a mortgage. In recent years, some of the most significant have been the appraisal fee, credit report fee, origination fee, application fee, title search fee, title insurance policy fee, and subscription.
The amount you pay can be between 2% to 5% of the house’s value, depending on what is charged. The average borrower paid $6,087 in closing costs and fees in 2020. These charges cover paperwork, a title search, and other expenses to obtain a mortgage.
While that number may seem significant at first glance, there are also plenty of ways to lower your closing costs. For example, just as there are down payment assistance programs, there are closing cost assistance programs.
You could also negotiate with the seller to include them in the total house cost. Although it is good to note that if there are multiple offers on a house, that could weaken your offer against other competitors. Also, doing so will increase your monthly payments over time because you will have borrowed more money to buy the house.
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. We can help you.
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.
[Related Article: How to save for a house: The home savings tips you should know]
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 some 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!
[Related Article: 7 Things to Know Before Buying a House]
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.