Buying a house may not require as much cash upfront as you think
Closing costs and lender fees are usually rolled into the loan
So how much money do you need to buy a house?
We will go over some of the costs associated with getting a home loan and provide you with estimated cash needed in the bank to close on a mortgage.
Upfront Costs Associated with Buying a Home
There a usually 3 items that you will need to pay for up-front. The down payment, closing costs, home appraisal, and cash reserves will determine how much money you need to purchase a home.
The Down Payment
The down payment is going to be the main thing you have to come out of pocket for. Home loans don’t require the large down payments they used to, you no longer need 20% down to be able to buy a house.
FHA loans are the most popular type of loan for first-time home buyers 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, it must come from a bank account, 401k, or investment account so the lender can trace the funds.
If you have cash, or money in other accounts you plan to use 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. With FHA loans you are allowed to have a friend or relative gift you cash for the down payment for certain home loans.
The Home Appraisal
A home appraisal is required by lenders to ensure the purchase price does not exceed the market value of the home.
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-negoiate the purchase price with the seller.
If this is every the case, sellers are usually open to lowering the selling price because if the appraisal is below the selling price, most buyers will not be able to get a loan on it.
A home appraisal costs between $400-$600 on average. This is a cost that will come upfront 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. The average closing costs in the U.S. is between 2% – 5%.
Closing costs cannot be rolled into your loan. However, you can reduce the amount of up-front money you need by having the seller pay some, or all of your closing costs. Most mortgages allow the seller to pay between 3%-6% of the closing costs.
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
Lender require you have additional funds in reserves 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 is going to leave them penniless. Typically lenders will want to see between 2-3 months of mortgage payments in savings.
On 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.
How much money do you need to buy a home?
Let’s assume you’re buying a $200,000 home using an FHA loan. FHA loans require a 3.5% down payment as long as you have at least a 580 credit score, so you need $7,000 down.
You’ll need two mortgage payments in reserves ($2,800). Closing costs we can estimate to be $4,000. The only other items you need to pay out of pocket are for the home appraisal.
- $7,000 Down payment
- $450 Home Appraisal
- $2,800 Cash Reserves
- $4,000 Closing Costs
Total cash needed to buy a $200,000 home is roughly $10,250 and $1,400 per month including escrow.
Another quick example on a 150k home.
$150,000 home – down payment $5,000 – closing costs – $3,000 – cash reserves $2,200 – home appraisal $400 – $10,600 needed upfront and approximately $1,060 per month.
You can find out how much money you need to buy a house by figuring out the estimated monthly mortgage amount and multiplying it by 2, add the down payment and closing costs, plus $300-$500 for the appraisal. This will give you a good idea of the amount of cash you need in the bank to get a home loan.