The housing market is fiercely competitive, with many homes selling well past their initial asking price. As such, prospective homeowners who are currently house hunting need to be prepared ahead of time. But exactly how much are you going to need to secure your new house and take care of all the paperwork and other things that may need to be done in the process? In this guide, we’re going to take an in-depth look into just how much you should expect to pay if a new home is in the cards for you.
Shopping for Your First Home: Prerequisites to Keep in Mind
Too many homeowners will fall in love with the concept of owning their first home and only focus on saving up enough to afford it. However, having plenty of cash to make the purchase isn’t the only thing you’ll need to focus on if you want to become a homeowner. The key prerequisites that you should actively be looking to meet include:
- Your Down Payment: Even though the down payment is not the only financial demand that you’ll encounter during your home buying journey (as you’ll discover throughout the guide below), it is one major factor in the home buying process that you should be focused on. If you’ve already done your research, you know what your budget is and how much you’re willing to put down on a house. Make sure that you have enough for your down payment before you even approach the houses on your list.
- Your Credit Score: Your credit score plays a crucial role in your ability to secure a mortgage loan. At the very least, you should have a minimum score of 620 to secure a conventional home loan. Other mortgage options may take lower credit scores. That being said, it’s better to have a higher credit score in the high 600s or 700s so you can ensure that you’ll get the mortgage you’re looking for. If you’re barely hitting the minimum score, you run the risk of being rejected or turned away from the options that you want most.
- Your Income and Employment: Since you’ll be looking for a home loan, you need to have steady employment as well as proof of income so that lenders can see you have what you need to pay off your loan after you’ve purchased the house. If you have traditional employment, it will be relatively easy to provide them with your income using your personal tax returns. If you own your own business or are self-employed, providing your business’s tax returns will be necessary as well.
- Your Debt-to-Income Ratio: High debt doesn’t bode well for mortgages as you’ve demonstrated to lenders that you already owe debt you still need to pay back. Lenders look for an average debt-to-income ratio of about 30 to 40 percent. However, you can also prove that you’re a good candidate for a mortgage loan if you have plenty of cash stored away or the ability to put even more down on your home so that you can reduce the overall loan you’re taking out.
- Your Mortgage Documentation: The last thing you want when you’re shopping for a home is for the process to be held up due to a lack of preparation. Long before you apply for your first loan, make sure that you have all of the required paperwork in place and ready to submit. This will ensure that securing your loan is easy rather than having to fill out more paperwork and go back, losing precious time that you need to get the home you want.
Buying a home is a big decision and one that requires careful thought and consideration. If you’ve found yourself reading this guide, chances are that you’ve already weighed the pros and cons of homeownership and came to the conclusion that now is the time to purchase your first home. However, in all the excitement of getting your first home, it can be easy to overlook some of the most essential elements listed above.
Before we dive any further into this guide, make sure that you’ve successfully prepared all of the points offered in this list. If you haven’t, figure out what you need to do in order to make the proper changes and come back later. All of the information offered below will still be relevant once you’ve gotten your finances in order!
How Much Cash Do I Really Need to Buy My First Home?
Too often, homeowners will only focus on some of the main financial requirements in the homebuying process, only to be surprised when additional charges and fees show up and make a surprise entrance. If you want to make sure that you can not only afford to buy your home but maintain it as well, you need to consider all of the financial liabilities that come with home buying. With that said, let’s dive into all of the expenses you can expect to encounter once you start shopping for your first home.
1. The Down Payment on the House
The down payment is the amount that you need to pay upfront when you secure a mortgage for your new property. Generally, you should expect to pay a down payment of at least 10 percent of the value of your home. This will help you secure your mortgage, but you may be faced with another issue: private mortgage insurance. If you wish to avoid having to pay for insurance on your mortgage, the best way to go is to save up at least a 20 percent down payment. If you find yourself looking to buy a home but don’t have as much to put down, there are other percentage options.
Of course, the amount that you pay will largely depend on the type of mortgage that you choose to apply for. To have a clear understanding of what you can expect to pay on your home, we first have to understand the different types of mortgage options available to you.
- Conventional Mortgages: Conventional mortgages are not insured by the federal government but funded by private lenders instead. Because of their nature, these types of mortgages are a bit more relaxed in regards to income requirements and other loan guidelines. That being said, these types of mortgages do often require a much higher credit score in the 700 range or beyond. If you go with a conventional mortgage, you can expect to pay at least 20 percent of the value of your home for your downpayment. If you pay less, you can expect to pay for private mortgage insurance.
- Fixed-Rate Mortgages: As the name suggests, fixed-rate mortgages have a fixed interest rate throughout the life of the loan. These types of loans have varying repayment periods, often offering 15-year loans, 20-year loans, or 30-year loans. As with the previous loan, you will typically pay 20 percent down on fixed-rate mortgages.
- Adjustable-Rate Mortgages: Adjustable-rate mortgages offer loans with a 30-year lifespan that will have an initial interest lock-in period of anywhere from five to 10 years. After which, the interest rate will turn into a variable interest rate (although it’s important to look for anare interest cap as payments that are consistently rising can make it difficult for you to afford your home over time. As with the above, you look to pay a 20 percent down payment on your home if you opt for an adjustable-rate mortgage.
- Government-Insured Mortgages: Government-insured mortgages are the mortgages that will allow you to pay far less than the traditional 20 percent. FHA loans, for example, only require a 3.5 percent downpayment on homes in order to secure funding. Meanwhile, other government-insured mortgage options like VA loans and USDA loans require no down payment. However, it’s important to dive deeper into each of these loan options to understand what they entail and what the advantages and disadvantages of each are.
- Jumbo/Balloon Mortgages: Jumbo and balloon mortgages most likely won’t apply to you, but it’s still important to mention them. Jumbo loans offer far more money than conventional mortgages and are generally reserved for high-end properties (which means that there are more stringent financial guidelines). Meanwhile, balloon mortgages are designed for homeowners who are only going to be in a certain area for a short period of time, allowing them to make monthly payments then requiring them to pay the rest of their loan on a set date.
For the most part, you’ll likely want to set aside 20 percent of your anticipated home’s value for your down payment. If you do secure a government-insured mortgage, you then have additional money saved up to help you deal with some of the other expenses mentioned on this list. If you’ve yet to decide which type of mortgage would be the best fit for your needs, use the categories above to dive deeper into your options and figure out which mortgage is perfect for your financial situation.
2. Closing Costs
Closing costs are often another well-known expense for prospective homeowners, but not every house hunter may know exactly how much they should expect to pay or what types of costs are included in the total closing cost of their home.
Beyond your down payment, your closing costs will often encompass around two to three percent of your total loan. That being said, closing costs will often vary depending on factors like location (which state you live in may affect things like property tax and other expenses) as well as the type of lender that you choose to work with as every lender may have different closing costs. But even if it may vary from lender to lender or state to state, exactly what are you paying for when you’re paying closing costs?
What Fees Are Included in Closing Costs?
- Application Fees: Much like you may have to pay a filing fee when you go to rent an apartment, you may have to pay application fees when you apply for a mortgage. Not every lender will charge these fees, but if they do, you can expect to pay around $300 to $500 for the associated fees.
- Appraisal Fees: The appraisal fee may be included in the application fees and will typically incur the same charges. An appraisal is conducted on any property you wish to buy to determine the market value of the home.
- Home Inspection Fees: A home inspection is absolutely vital if you wish to avoid buying a house with invisible issues that you’ll have to tackle after you’ve completed the purchase. Home inspections will typically cost anywhere from $200 to $400.
- Title Search: A title search is designed to uncover any existing liens on the property. This too may cost you anywhere around $200 to $300.
- Title Insurance: Unfortunately, title searches are not always thorough, and liens can be discovered after you have conducted a search on the property. In an event like this, it’s best to have title insurance, which protects you against liens and even gives you the ability to refinance or sell your home. Title insurance will cost you around $200.
- Real Estate Transfer/Mortgage Taxes: Most states will tax the exchange of the property, either gauging these taxes by the value of your property or the mortgage that you’re paying. Unfortunately, there’s no way to determine how much you can expect to pay ahead of time as every state will charge you differently.
- Attorney Fees: If your closing is handled by an attorney, you can expect to pay a bit more for this than any of the other items mentioned previously, with out-of-pocket costs ranging anywhere from $400 to $1,000 or more depending on where you live and the property that you’re buying.
With that in mind, there are ways that you can figure out how to avoid these costs, at least initially. In some cases, you may be able to find a seller who’s willing to pay your closing costs, but you should expect to negotiate and only do so if you’re in an area where it’s permissible. The second option that you have is to convince your lender to include your closing costs in your interest rates. After all, if you’re spending a great deal of money on your down payment, adding only more to what you have to pay can place greater stress on you during the home buying process.
3. Prepaid Costs
Prepaid costs are exactly what they sound like, costs that are paid ahead of time in order to secure a specific service. One such example of this in homebuying is your escrow. The real estate taxes and insurance that we mentioned above is typically put into escrow so that the lenders can guarantee that the money will be available when the payments for these items need to be made.
Unfortunately, for home buyers, this means having to pay anywhere from two to 12 months’ worth of real estate taxes into an escrow account upfront. This illustrates why homeowners need to have far more money in their bank account than just the amount they need to make their initial down payment.
Another situation in which you may have to make upfront payments is in regards to your homeowner’s insurance, which can require up to two percent of your total loan amount. If you’re looking to circumvent these costs, you can either ask the seller to pay for them, pay more to the lender, or put a greater down payment on your home.
4. Mortgage Payments
“Yes!”, you think to yourself, “I finally own my own home”. In all of the excitement of closing, some people can forget that they don’t own their home outright. In fact, they may even overlook one of the most important aspects of their home: their mortgage.
Much like you budget for your rent, you should have an established budget for your mortgage payments so that you know you won’t be falling behind and potentially losing your home down the road. In our previous section about down payments, we briefly discussed some of the mortgage options you have at your disposal and what benefits they provide.
Once you’ve done your research, spoken with several lenders to get a better idea of what will work best for your current budget, and received some quotes, do the work necessary to calculate what your monthly payments will look like and how you can best adjust to that price to avoid missing out on payments or missing out on any other essential portions of your budget.
The good news is that most lenders won’t work with someone who can’t prove that they have the assets they need to avoid defaulting on their mortgage early on. For the most part, lenders will require that you have at least two months of cash reserves to cover the first two mortgage payments in a liquid account (such as a checking account). Lenders won’t accept assets or other accounts that are difficult to liquidate. Often, dipping into accounts that aren’t cash can also indicate to a lender that you lack the funds needed to purchase a home.
Put simply, it’s not just about having enough cash to afford all the expenses of buying a home but having enough cash in the bank to prove that you can easily afford the financial responsibilities of homeownership.
5. Utility Adjustments
When buying a home, you may be required to compensate a seller for some expenses that they would have otherwise not paid if the home was sold by a specific date. Take, for example, utilities. If the homeowner was paying for water, trash removal, or sewer expenses, you may be required to pay these expenses. Fortunately, these types of expenses are only a couple of hundred dollars at the most and shouldn’t put too much of a strain on your budget.
6. The Expenses That Most Homeowners Overlook
When it comes to home buying, there are a ton of additional expenses that you won’t find on many of the guides explaining just what you can expect to pay. This means there are easily items you may be overlooking that can pop up as unexpected costs later. To ensure that you are prepared for everything you have to pay in the future, here are some overlooked expenses to keep in mind.
- Utility Payments: Once you move into your new home, you’ll have to pay for water, gas, electricity, trash, and other utilities that are going to tag more money onto your monthly mortgage payments. Plan ahead for these expenses and make sure that you’re ready to pay for them once your utility bill comes.
- HOA Fees: If you decide to buy a property that belongs to an HOA, you’ll need to pay HOA fees and other maintenance fees associated with belonging to an HOA. You can avoid these expenses by making sure that you avoid properties in HOAs (unless this is something that you’re interested in as a home buyer).
- Maintenance Expenses: Even with an initial inspection, no home is perfect. There still may be work that needs to be done to the driveway, the walls of the home, or even the roof. In addition to this, you need to consider landscaping expenses or the costs associated with the upkeep of a pool on your property. You should have enough stored away to deal with these maintenance expenses.
- Emergency Fund: This doesn’t necessarily apply to your home itself, but every homeowner should have an emergency fund to cover unforeseen expenses or support them during a time of financial hardship. There is no true amount that should be saved in an emergency fund, but a good number to go by is enough to cover six months of all of your expenses. This way, if you do face an emergency expense, you can easily pay for it.
- Moving Expenses: Whether you’re purchasing a truck to move all of your belongings or enlisting the help of a moving company to take your items to your new property, there are going to be moving expenses that you will have to pay. Reach out to movers in your area to see how much they will charge for your move so that you can plan this out ahead of time.
- Purchasing New Household Items: When you’re moving into a new house, you aren’t necessarily going to take everything with you. Perhaps your couch is broken and won’t hold up during the move. Maybe your old fridge is not very efficient and needs to be repaired constantly. Consider what you’re going to be taking with you when you move, what you’re going to be throwing out, and which items you’ll need to replace once you get to your new home.
- Renovations: No home will be absolutely perfect unless you build it yourself. Whether you’re looking to retile the kitchen or completely repaint the exterior of the home, most homeowners have renovations that they wish to tackle at some point. It can be helpful to either save this money in advance or figure out how much you’ll need to save and create a budget for yourself once you move into your new home.
- Cleaning Materials, Groceries, Other Essentials: There are a lot of new things that we need when we move into a new home. For example, your new home may have far more space than your old one, requiring you to purchase new cleaning materials to get all of the places that may have not been cleaned prior to moving in. Since you can’t bring your fridge along with you while keeping it plugged in, you’ll likely need to go to the grocery store and purchase these essentials so that you and your family have food to eat. Think about these types of essential items and what you may need as soon as you move into your home.
- Cable and Internet: The term “utilities” often encompasses items like cable and internet, but you’re going to have to go to your current provider in order to get all of the equipment installed on your property. Make sure you have all the materials you need from your current property and prepare to get it installed in your new home ASAP. Otherwise, you may be spending more time than necessary waiting to get this done.
As you can see from this list, there are numerous costs that come with homeownership that you may not even know about until it’s too late. Along with the main expenses that we’ve covered throughout this post, make sure to budget these items into your home buying budget so you aren’t blindsided by them when they do show up!
Preparation Is Key to Being Financial Prepared for Homeownership
The worst thing that you can do when you’re looking to buy a home is to be underprepared. When this happens, you can end up delaying your dream or even becoming delinquent on your loan, losing your house altogether. The good news is that all of these problems can be avoided with the right preparation. If you are looking forward to buying a house and want to know just how much you need to save before you start looking, the guide above covers all of the potential expenses you can expect to encounter on your journey so you know about all of them long before you secure your mortgage and buy your home!