Buying a home is an expensive endeavor. Between the down payment, closing costs, and preparing for the unexpected, it can be hard to know exactly how much money you need to buy a house. Below are several common expenses home buyers should prepare for, and how to calculate the amounts you’ll need in order to cover all the necessary expenses.
How Much Do I Need To Buy A House?
Most potential home buyers are aware of the bigger expenses for buying a house: the down payment and closing costs. How much to save in total depends on your location, the price of the home, how much money you have to put down and how big of a mortgage you’d like to take on.
Saving up a sizable down payment is often one of the biggest obstacles for first time home buyers. Commonly cited best practice is to save up at least 20% of the purchase price for a down payment, which is – at minimum – tens of thousands of dollars. It can be difficult to amass this amount in high-cost urban areas or for potential buyers with large student loan burdens.
Fortunately, low down-payment options, like the FHA Loan or VA loan (for those who are eligible) do exist. FHA loans are backed by the Federal Housing Administration, secured by the government, and allow home buyers to put down as little as 3.5%. This puts homeownership in the reach of many who would be unable to save a large amount of money.
It’s worth noting many conventional loan options also allow buyers to put down less than 20%, but qualification depends on your income, credit score and total debt-to-income ratio. Just Be advised any time you put down less than 20%, you will end up paying mortgage insurance on top of your monthly mortgage payment. This is an additional monthly expense and could make your overall monthly payment higher than expected. Depending on rent prices in your area, however, buying your home (even with the additional monthly mortgage insurance premium) could still be a good money move and less expensive than what it costs to live in a comparable rental.
Closing costs are another area of anxiety for potential homeowners, as these costs are often more expensive than many realize and increase the overall total buyers need to pay at closing. Rather than one lump sum, closing costs are comprised of many little fees, such as:
- Credit report fees
- Appraisal fees
- Origination fees
- Application fees
- Title insurance and title search fees
How much each of these fees costs varies by lender and where you live, but a good “rule of thumb” is to budget 2% – 5% of the home’s purchase price for closing costs.
For example, if you’re buying a home at $250,000 and want to be prepared for every expense, you’ll want to save up 5% of the purchase price, or an additional $12,500 on top of your down payment for closing costs.
Many lenders do not require a home inspection, but it is considered best practice. Real estate offers include a time frame for “due diligence” so homeowners have time to get the home inspected.
According to estimates from Realtor.com a home inspection costs anywhere from $300 – $500 for a single-family home. While this is an additional out-of-pocket cost for buying a home, hundreds of dollars up front can save thousands down the road, or better still, keep you from buying a home that may end up being more headache than it’s worth.
Other Expenses And The Total Cost Of Homeownership
Mortgage payments look and act a lot like rent payments, with the main difference being that you’re paying off a loan to a bank and building equity rather than paying a landlord. The total mortgage payment is actually made up of four components, known as PITI.
- Principal on your mortgage loan (the purchase price)
- Interest on your mortgage loan
- Property taxes
- Homeowner’s insurance
Depending on how you like to pay and the terms of your loan, you can pay your mortgage either monthly, or bi-weekly.
Homeowners are subject to property taxes in the municipality where they live. Property taxes help pay for public amenities like schools, roads, and infrastructure. Each year, your city/county’s tax assessor will come and check out your property and determine a fair market value for your home. You then take your home’s FMV and multiply it by the tax rate in your locale and this is what you’ll owe each year in property taxes.
Most often, property taxes are pre-calculated by the lender and added to your monthly mortgage payment so the homeowner doesn’t get hit with an unexpected bill each year.
Homeowners with mortgages are required by the lender to secure the “asset” with homeowners insurance, and this cost will also be added to your monthly payment with the bank.
The total homeowners insurance premium is either paid annually or bi-annually, but it depends on the insurance company. Homeowners insurance typically includes coverage for the dwelling and all of the items within the dwelling, but the total amount you’ll pay in insurance also depends on if you opt for additional “add on” coverages such as:
- Hazard insurance
- Flood insurance
- Any additional dwelling coverage (like a guest or carriage house)
- Living expenses if home becomes uninhabitable (“loss of use” coverage)
- Personal liability insurance (if you use the home for a business as well
If you live in a neighborhood with shared amenities, a condo or townhome community, or other planned development your neighborhood may come with an additional monthly HOA (homeowners association fee). This will be paid separately from your monthly mortgage payment. Pay attention: even a small amount can mean the difference between comfortably affording the home and a place being “too expensive.” For many, an HOA fee is reasonable enough, when this cost covers shared perks like a pool, tennis court, fitness center, clubhouse, or lawn and pest control.
Even renters have to pay utilities: electricity, water, internet, but homeowners may find it surprising homes also need maintenance on a regular basis. A good guide is to budget 1% of the home’s purchase price annually for home maintenance: anything from fixing faucet leaks, to roof replacement, to eventual home upgrades would come out of this budget.
As cash-intensive as purchasing a home can be, there are a few ways to lower closing costs.
Buyers can (and should) shop multiple lenders and select one with the lowest fees, and/or you can negotiate with the seller to pay some (or all) of your closing costs. There are also many first-time home buyer programs that can offset the out-of-pocket costs that come with homeownership.
Self-education can also be a great way to make sure you don’t overpay for a home. In addition to educating yourself on the overall home buying process, make sure to research common (and costly) mistakes to avoid.