How Much Do You Need To Buy A House? A Cost Breakdown
Victoria Araj7-minute read
February 23, 2022
There are many costs involved in buying a home, from the down payment and closing costs to homeowners insurance and repairs. Let’s take a look at the costs of buying a home so you know what to expect and how much to save.
How Much Money Do You Need For A Down Payment?
Though mortgage lenders once required a 20% down payment, this is no longer the case.
Today, you can get a mortgage for as little as 3% down. The minimum down payment requirement is primarily based on the type of home loan the borrower applies for, although factors like the property type, your credit score, and current mortgage rates can play a role too. Here are the minimum down payments for each type of loan (assuming you’re purchasing a new primary residence that’s a single-family home):
- For FHA loans, the minimum down payment is 3.5%.
- For conventional loans, the minimum down payment is 3%.
- For VA loans, the minimum down payment is 0%.
- For USDA loans, the minimum down payment is 0%.
- For jumbo loans, the minimum down payment ranges from 10.01% to 25%, depending on your credit score, the loan amount and how you plan to occupy the property.
The nice thing about smaller down payments is that you can get into a home sooner. Saving up for a 20% down payment can take a long time. And emptying your savings account for that 20% may mean you won’t have money left over to repair or renovate your new home.
However, a larger down payment may offer you benefits like a smaller monthly payment, a better interest rate or less expensive mortgage insurance.
How Much Do You Need For Closing Costs?
The other significant expense of buying a house is closing costs, which refers to various fees you’ll pay for at closing. Closing costs can range from 3% to 6% of the purchase price of the home. You can sometimes ask the seller to pay for part or all of your closing costs, but sellers are less likely to do so in a competitive real estate market.
Your lender may require you to pay a deposit when they start processing your application. This money helps cover the cost of any third-party services that your lender will use to approve your loan. The deposit gets credited toward your closing costs once you’re approved.
Once you apply for the loan, your lender is required, by law, to provide you with a document called a Loan Estimate. Your Loan Estimate lists the costs involved in the mortgage, so you know what you’re paying for.
Once you’ve signed a purchase agreement, your lender will order an appraisal of the property from an appraisal management company. The assessment provides you and your lender with a third-party opinion of the home’s fair market value. This requirement protects you from paying too much for the home.
The appraisal usually costs between $200 and $600, but the costs can exceed that range. For example, it may cost more if the property has multiple units or is located in a remote area.
Title Company Costs
Title company costs, sometimes referred to as exam fees, cover the cost of a record search to make sure the property owner actually has the right to sell the property and that there are no claims or judgments against it.
Title Insurance Costs
Title insurance protects you and your lender against property loss or damage you might experience if something’s wrong with the title. The insurance will cover both parties if someone challenges your ownership of the property.
You just pay for title insurance once, alongside other title fees, as part of your closing costs.
In most states, a property survey is required by law. Once your lender orders the survey, a professional surveyor will visit the property to create a map showing the property lines and the different components that make up your property, such as the driveway or garage. The cost of the survey varies depending on the size and location of the property.
The down payment and closing costs are required for you to get a mortgage, but there are a few other costs to consider when you’re buying a home:
- Earnest money: This is a deposit you’ll pay to show the seller that you’re serious about buying the home. The earnest money deposit is typically 1% to 2% of the purchase price. The deposit isn’t usually required, but it’s customary and can help set you apart in a competitive market.
- Home inspection: A home inspection is generally not required to get a mortgage, so this won’t be part of your closing costs. However, a home inspection protects you from buying a home with major problems. Home inspections usually cost a few hundred dollars – which is a small price to pay for peace of mind.
- Prepaids: When buying a home, you sometimes have to prepay certain expenses such as property taxes, homeowners insurance or mortgage interest. Your mortgage lender will likely have you make an initial escrow deposit that they’ll put into an account for you. Your lender will then use the escrow account to pay any property taxes, interest or insurance premiums when they come due.
- Homeowners association (HOA) fees: If the home you're buying is located in a community with an HOA, you might have to pay a monthly fee. These charges usually cover certain services and amenities like trash removal, security or access to common areas.
- Home warranty: A home warranty is an entirely optional purchase, but it could help you save money. A home warranty is like an insurance policy that protects your home’s major systems and appliances – like your air conditioning unit and refrigerator. Not all home warranties are the same, so you’ll want to shop around for the best and most affordable coverage. You can expect to spend a few hundred dollars a year for a basic home warranty.
- Repairs and renovations: Few homeowners are fortunate enough to purchase a home that requires no repairs or renovations. It’s wise to set aside money for this upfront so you can immediately address any problems that you can’t live with for a while. Depending on the age of your home, we recommend setting aside 1% – 3% of the purchase price per year.
- Real estate agent costs: If you’re buying a home (and not also selling one), you usually won’t have to worry about paying your real estate agent. In most cases, the seller pays your real estate agent a commission, which is typically 3% of the home’s purchase price.
Homeowners Insurance Costs
Homeowners insurance covers your home in the event of a fire, storm or another type of natural disaster. It also covers break-ins and theft of your belongings, as well as liabilities if someone is injured on your property. Lenders usually require that you have homeowners insurance for the life of your loan. Depending on your location, you may also be required to purchase other insurance policies such as flood or hazard insurance.
The price of homeowners insurance varies widely depending on where you live, how much your home is worth and your home’s features. You can usually expect to pay about $100 a month for homeowners insurance. This charge is sometimes paid for as part of your monthly mortgage payment through an escrow account.
Mortgage Insurance Costs
Depending on the size of your down payment and the type of loan you get, you may be required to pay for private mortgage insurance (PMI) or another type of mortgage insurance premium, which protects your lender in case you default on your loan.
The cost of mortgage insurance depends on your loan type, down payment amount, credit score and many other factors. It can add $100 a month or more to your mortgage payment.
Ways To Prepare For Buying A Home
Saving up enough money to buy a house can be time consuming but it will be worth the effort once you close on your dream home. In the meantime, here are some ways you can speed up the saving process:
- Monitor your credit score. Mortgage lenders analyze your credit history when you apply for a loan. They will determine your creditworthiness, loan terms and interest rate in part from your credit report, so if you have a lower score, you need to know ahead of time.
- Make extra debt payments. Besides looking at your credit score, lenders also look at your debt-to-income (DTI) ratio. If you have a lot of debt compared to your monthly income, you might have difficulty getting preapproved for a loan. By making larger payments on student loans, medical bills or credit card balances, you can reduce your debt and improve your DTI.
- Set aside a portion of your monthly earnings. You can automatically put away money from each paycheck by having your bank deposit a small amount into your checking account. Before you know it, you’ll have a decent amount of savings ready for a down payment.
- Create a mortgage budget. Before you fill out a loan application, you should figure out how big of a monthly mortgage payment you can afford. This amount will help determine what home price range you should be shopping in. You can use our online mortgage calculator to help you create your house budget.
- Compare lenders and interest rates. First-time home buyers often get excited when starting the loan process. Once approved, they might be tempted to start shopping and putting in offers on houses immediately, but that might create an issue if they have a high interest rate. Instead, take the time to research a few lenders and different types of mortgages before applying. This extra step can ensure you have the best available mortgage and interest rate. But don’t stop at the interest rate. Also make sure you read the client reviews. As an example, you might get a great interest rate, but they could also charge for things like making a payment over the phone or other fees so that price isn’t as attractive.
The Bottom Line
There are different costs and fees involved in buying a home, including your down payment, insurance, inspections, warranties, deposits and other fees. Once you’ve assessed all the costs involved and saved for your down payment and closing costs, it’s time to get approved. Rocket Mortgage® offers an online option to apply for a loan and see exactly how much you’ll need for a down payment and closing costs. You can also give us a call at (833) 326-6018.
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