It can often be misleading how much money is needed to buy a home. Figuring out how much money you need to buy a house also entails more than the seller’s listing price. There are more costs involved than just the down payment, and this can come as a surprise to many new homeowners.
The ideal amount for a down payment depends on various factors, including your current finances and how much a lender is willing to contribute based on your credit score. Being able to make a larger down payment is helpful when it comes to paying less on your mortgage each month, but there is a balance, and you do not want to put down too much and find yourself “house poor” without the means to live and pay off other expenses.
You have worked so hard to get to this point and gather the necessary funds for the down payment, but most that is not the end of it, and it will likely require many more unforeseen costs to finish the deal. Here is a breakdown of costs to consider:
Most people would advise making a down payment of at least 20%. It usually looks better to lenders when they see clients willing to put down more money up front, and it will increase your chances of being approved for better mortgage rates. A 20% down payment also helps you avoid Private Mortgage Insurance (PMI), which can add to your monthly running costs. However, there are a few different types of mortgage loan options that prospective home buyers can leverage so as to not require a 20% downpayment on a home. Two of these include: FHA loans and conventional loans. First-time homeowner loans (FHA loans) are insured by the Federal Housing Administration and require a minimum down payment of 3.5% for those with a 580 credit score or higher. Of course, there are exceptions to this depending on the size of your downpayment. Conventional loans, on the other hand, typically require a 620 credit score or higher with a 3-5% downpayment on the price of the home. All of your options should be explained to you by your mortgage lender once you know what you qualify.
Closing costs are what tend to surprise new homeowners, which is why you should always estimate these when wondering how much money you need to buy a house. These are fees you will have to pay to lenders and other third parties to officially close a deal on a home, such as an appraisal fee, application fee, origination fee, credit report fee, other paperwork fees, insurance, and a home inspection.
It is important to keep in mind that there will likely be other expenses that are not considered closing costs that come up as well when you close on a home. These may include homeowners insurance and property taxes. You will likely have to pay interest on however many days there are remaining in the month. A general estimation of how much homeowners will have to pay in closing costs is around 2-5%.
Buying a home is the first step in an ongoing series of expenses. It is important to consider mortgage payments along with other monthly expenses when putting together your budget. Factoring those in ensures that you have a good idea of how much money you need to buy a house and what you are signing up for.
Knowing how much the mortgage will cost you every month is important to consider, since that is something that will remain with you long after closing day. Normally, if you are unable to put at least 20% for the down payment, there is the PMI on top of the principal and interest.
Feeling overwhelmed by the numbers yet? Pathway Homes can offer a better way. With our rent-to-own programs, we offer homeowners the ability to buy the home of their dreams with zero down payment and the flexibility to work with their particular financial situations.
We created lease to own home programs to help new homeowners reach their goals and be able to afford their homes much sooner than other available options can afford.