Buying a house may not require as much cash up front as you think.
We will go over some of the costs associated with getting a mortgage and show you how much you’ll need in savings to qualify.
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Upfront Costs of Buying a Home
There are usually three expenses to buying a house that you will pay up-front, the down payment, closing costs, and the home appraisal.
The earnest money deposit is given to the seller along with the agreement; it is credited towards the down payment at closing.
You cannot spend all of your money on these costs, and lenders will require you have cash reserves in savings of at least 2-3 months of mortgage payments.
The Down Payment
The down payment makes up most of the total costs of buying a home; the amount depends on the type of loan you get.
Requirements by Mortgage Type
Average Amount Cash Needed to Get a Mortgage
FHA loans are the most common type of loan used by first-time homebuyers because they require just a 3.5% down payment.
The down payment cannot be rolled into the loan; you will have to pay it upfront. You cannot use cash for the down payment, and it must come from a bank account, 401k, or investment account so the lender can trace the funds.
If you have cash in other accounts, you plan to use it for the down payment. You should move it into one account a few months before you plan on closing.
You will need 2-3 months of bank statements proving the money is yours and is coming from your account.
Some types of mortgage programs allow a friend or relative to gift you cash for the down payment.
For example, let’s say you’re buying a $200,000 house using an FHA loan.
- FHA loans require a 3.5% down payment as long as you have at least a 580 credit score – $7,000 down payment.
- You’ll need two mortgage payments in reserves – $2,800
- Closing costs of 2% – $4,000
The only other items you need to pay out of pocket are for the home appraisal ($300-$500)
- $7,000 Down payment
- $450 Home Appraisal
- $2,800 Cash Reserves
- $6,000 Closing Costs
The total cash needed to buy a $200,000 home is roughly $16,250, about 8% of the purchase price. The monthly payment would be $1,400 per month, including escrow.
A good rule of thumb is to have 10% of the purchase price in savings.
The Home Appraisal
Lenders require a home appraisal to ensure the purchase price does not exceed the home’s market value.
Lenders will not lend you more money than a home is worth. If the LTV (loan-to-value) ratio exceeds the maximum percentage, your loan allows, you’ll need to re-negotiate the purchase price with the seller.
If this is the case, sellers are usually open to lowering the selling price because if the appraisal is below the selling price, most buyers will not get a loan on it.
A home appraisal costs between $400-$600 on average. This is a cost that will come out of your pocket and is paid directly to your lender. It cannot be rolled into the loan and is not refundable for any reason.
Closing costs are fees charged by lenders that include several items wrapped up into one. On average, closing costs are between 2% – 5% on the loan amount.
They cannot be rolled into your loan. However, you can reduce the amount of upfront money you need by having the seller pay for closing. Most mortgages allow the seller to cover between 3%-6% of the purchase price.
Maximum Allowable Seller Paid Closing Cost by Loan Type
- FHA mortgage – 6%
- VA mortgage – 4%
- USDA mortgage – 6%
- 203k mortgage – 6%
- Conventional mortgage – 3%
Breakdown of Closing Costs and Fees
- Origination fee – A fess charged by lenders for processing and issuing the loan
- Discount points – Discount points are pre-paid interest you pay up-front to lower the mortgage rate
- Appraisal Fee – Lenders order a home appraisal to get the market value of the property
- Credit report – Fee for pulling a copy of your tri-merged credit report and scores
- Title Check – A title company will perform a check to see if there are any liens or issues with the deed or title
- Owner Title Insurance – Insurance for the lender to protect them in the event there are any title issues
- Attorney Fees – Some lenders will have a lawyer present at closing or review the documents
- Underwriting fee – Fee charged to cover the underwriting of the mortgage
- Pre-paid property tax – 2 months worth of property taxes is usually paid upfront
- Home Inspection – Covers the cost of having the home inspected by a certified home inspector.
- Courier Fees – Fees charged for any courier fees or FedEx, UPS services
Lenders require you have additional reserve funds when closing on a mortgage. This makes sense. They don’t want to give a ton of money to someone to get a mortgage that will leave them penniless.
Typically lenders will want to see between 2-3 months of mortgage payments in savings.
A $200,000 home using an FHA loan with a 3.5% down payment will have a monthly mortgage payment of around $1400 a month, including insurance and PMI. You will need at least $2800 left in your account to meet the cash reserve requirements.