How Much money do you need to buy a home - Saving for the Down Payment

 

So you want to buy a home, how much money do you need to buy a home.  Saving for the down down payment is an important of part of the home buying process.  Saving funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. By saving money for a down payment will help you determine how much of a house payment you can afford each month.  Even if you don't use your savings toward the down payment it is great to have a nest egg for the unexpected items of home ownership.  During this period you should round up your financial records, examine your spending habits, and set a budget you can live with. 

 

Setting a budget and house payment is the most important thing you need do to do before starting to look for a home.  Banks and lenders will usually loan you more than you can afford to pay each month.  You don't want to be house poor.  You want to be able to take vacations and enjoy life too. Remember, too, that the down payment is not the only up-front expense. An allowance for closing costs, home inspection, and homeowners insurance should also be included in your savings budget. 

 

In the past if you had a good credit score you could buy a home with as little as no money down.  But those days are gone.  There is only one loan that you can buy a home with no money down.  (USDA rural housing loan).  Now you need at least 3 1/2% for a down payment on a FHA loan and 5% down on a conventional loan.  You may not even much for closing costs if the seller agrees to pay for part of them.

 

The down payment is usually expressed as a percentage of the overall purchase price of the home, and varies depending on the lender, the type of financing and amount of money being lent. In the past, the typical down payment was 5%, 10%, 15%, 20%, but in recent years lenders have been willing to offer conventional financing with as little as 3% down and even 0% down.  U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the Federal Housing Administration (FHA), also require minimal down payments. 

 

Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry PMI, or private mortgage insurance. Unless you split the loan into 2 loans.  This is called and 80/20 and you are not required to have PMI.  However interest rates are higher for this loan.  So have your mortgage person run both scenarios and tell you which way is better for you.

 

PMI.  This insurance protects the lender in case of loan default.  It is a monthly premium that is part of your house payment.  For FHA loans the month PMI is lower because you have an up-front payment at closing, as well as a monthly premium. However, once you have paid off 22% of the loan, you can request the policy be canceled. Some lenders cancel the premium automatically, while others require you to make a request in writing. 

 

How much money do you need to buy a home can be reduced by a gift from a relative with some loans.  Saving for the down payment can be shortened by gift funds. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts. 

 

Buyers are usually required to deposit earnest money with the real estate agent's company, title company, or seller when they make an offer. If the offer is accepted, the earnest money is then credited towards the down payment. The amount varies widely depending on the seller and local custom, but be prepared to have some earnest money.  The amount of earnest money varies from $1000 to 5% of the purchase price.   Ask your agent what he thinks would be required for a home purchase in your price range.

 

You should have a home inspection.  I believe this is a must for every home buyer.  This tells you what is wrong with the house and what repairs may be needed.  A home inspection usually costs about $300 -$500 depending on the size of the house.  

Home owners insurance has to be paid up 1 year in advance.  The bank or lender wants to be sure that if there is a fire or damage to the property that it would be repaired or replaced.   So you need to have the money to pay for home owners insurance.  Sometimes this can be covered by seller's concessions.

 

 

In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, appraisal, loan fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs. 

 

Some buyers are surprised by the amount of the closing costs, which can easily run into the thousands of dollars. Remember, though, that closing costs can be negotiated to be paid by the seller. For example, you may agree to pay the full asking price in exchange for the seller paying all the allowable closing costs.   Lenders usually allow sellers to pay for closing costs up to 3% of the purchase price to be paid by the seller.  So if you do not have any money this is a great way to get into a home.

 

So now you know how much money do you need to buy a home depends on 

     *  how much is gifted to you

     *  what type of loan you are getting

     *  how much of a down payment is required

     *  how much the seller pays of your closing costs

 

Saving for the down down payment could be quite easy.  So Email me today to help you pre-approved and pre-qualified for your new home.

                                                                                        YesMyRealtor@gmail.com

      

 

 

Russ Ravary is a licensed real estate agent in the State of Michigan and a Realtor. 

 

 

 

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