How Much Money Does It Take to Buy a House?
I get this question a lot from my buyers, and my short answer is that it’s a long answer! Seriously though, there are a lot of variables to consider when addressing with this question, and the best resource for it is a mortgage professional. One of my go-to mortgage people – Kristy Osborn with Service First Mortgage – sent me an interesting email on this subject that I thought would be great to share. It helps explain the ins and outs of determining how much you’ll need to bring to the table to buy your next dream home!
Basically, there are three factors that make up a borrower’s out-of-pocket expenses at closing: 1) Downpayment, 2) Closing Costs and 3) Prepaids.
1. Downpayment – Each Mortgage Type has their own standard requirement for down payment:
- FHA– 3.5% down payment required
- VA– No down payment required
- USDA– No down payment required (this type of loan is restricted to certain zip codes)
- Conventional– Minimum 5% down payment required (there are also 3% down programs with very restrictive guidelines)
2. Closing Costs – Closing costs are comprised of the 10+ companies that are involved in the transaction. These include Appraisal, Survey (typically the sellers’ survey can be used if they have an existing one), Tax Certifications, Underwriting, Processing, Wire Transfer Fees, Title Fees, Recording Fees, Credit Check Fees, Recording Fees, Closing Attorney, Closing Docs Attorney (who draws your closing documents), etc, etc.
3. Pre-Paids – This amount of money is dedicated to setting up your escrow account with your mortgage company, so that your mortgage company can pay your taxes and insurance as part of your monthly payment. Typically this consists of 1 year of homeowners insurance +3 months in reserve in insurance + 3 months of reserve in taxes. You don’t have to have an escrow account with your mortgage company if you’re putting 20% down on your new home.
For a quick calculation of the amount you’ll need – please note this is not exact and will can vary widely – the following ballpark figures can be applied for you to know the amount that you might need.
- $100,000 sales price- use (for closing cost and prepaids) $6,000.
- For each $1000 up or down add or subtract $30 ($101,000 would be $6,030; $99,000 would be $5,970).
- Add the down payment required/ requested (see above)
So, if you’re purchasing a $200,000 home with an FHA loan, then you can estimate $6,000 + $3,000 + $7,000 Downpayment = $16,000 needed.
Another consideration to this amount is that buyers can ask sellers to cover some of their closing costs. Different types of loans allow for different amounts. It is important for me to say, however, that in this competitive sellers market that we’re currently in here in North Texas, seller contributions are becoming increasingly rare…this is especially true when there are multiple offers on a home, so don’t count on this! In a normal market though, this is how much sellers can contribute as part of negotiations of the contract to purchase their home:
- FHA -The seller is allowed to pay any or all of the closing cost and prepaids up to 6% of the sales price provided the buyer has at least 3.5% into the loan.
- VA – The seller is allowed to pay any or all of the closing cost and prepaids up to 4% of the sales price plus the VA non-allowables (costs that VA does not allow a buyer to pay so the seller has to agree to them as part of the negotiations).
- USDA -The seller is allowed to pay any or all of the closing cost and prepaids up to 6% of the sales price.
- Conventional– The seller is allowed to pay up to 3% of the sales price toward the closing cost and prepaids, but cannot pay any of the downpayment. If the buyer is putting 10% or more down, the seller is allowed to pay up to 6% of the sales price toward the closing cost and prepaids, but cannot pay any of the downpayment. For an investment property, the seller is maxed at 2% of the sales price toward buyer’s closing cost and prepaids.
I hope this has been helpful and informative! Of course it costs money to buy your new home, but considering the great investment that it is and will be for you for years to come, that money is well worth it. As always, I’m here for any questions you might have, so please don’t ever hesitate to get in touch!