The upfront costs of buying a home, including a down payment, is one of the barriers for many prospective homebuyers. So we want to address a common question, “How much money do I need to buy a home?”
Cash Needed to Buy a Home
The amount of cash needed to buy a home varies significantly, depending on numerous factors. For example, a homebuyer with a zero down payment mortgage will require substantially less money than a buyer with a 3.5%, 10%, or even a 20% down payment.
Homebuyers often need to provide a down payment of between zero to around 5-6% of the purchase price, though some buyers will pay 20% down.
Closing costs typically run around 2-5% of the sale price, which is in addition to the down payment.
Closing costs include:
- Lender fee.
- Credit report.
- Flood certificate.
- Closing fee paid to the title/escrow agent.
- Title insurance.
- Title search.
- Fees for notaries, document preparation, etc.
- Documentary stamps.
- Intangible taxes.
- Fees imposed by civil government.
How To Reduce the Amount of Upfront Cash Required
Many prospective homebuyers say that saving for a down payment and closing costs is why they can’t afford to buy. However, there are several options available to homebuyers to drive down the upfront cash needed to buy a home.
As previously mentioned, zero down payment and low down payment mortgages are available to many buyers. Additionally, states often have down payment assistance (DPA) programs to help homebuyers.
Other options may include:
- Using money gifted by a family member.
- Negotiating with the seller to pay all or a portion of the closing costs.
How Much Money do I Need to Buy a Home?
Depending on the type of loan and your credit score, the down payment can vary. Buyers with a credit score of around 620-650 can typically secure a mortgage with 3-3.5% down.
Furthermore, buyers who qualify for a VA or USDA home loan can purchase a home with a zero down payment.
Irrespective of the down payment, closing costs need to be paid. These can vary by location and the home’s price. Typically, homebuyers should budget 2-5% of the purchase price for closing costs.
Earnest money is typically 1-3% of the sale price and deposited at the time the sales contract or purchase agreement is signed. It is usually held in an escrow account until closing, at which time it is applied to the buyer’s down payment and closing costs.
If the buyer decides not to go through with the purchase for a reason other than a contingency in the purchase agreement, the earnest money goes to the seller.
Cash reserves are the savings you need to have after closing on the home. In essence, they are emergency funds to pay your mortgage in the event you lose your job after closing on the home.
Generally, the cash reserve required by a mortgage lender is often 2-4 months of the total mortgage payment. So, if your monthly mortgage payment is $1,000, you may be required to have cash reserves of $2,000-$4,000.
Additional Costs for Homebuyers
Additional costs that homebuyers should strongly consider budgeting for are moving expenses, an independent home inspection to check for issues with the home, and an emergency or rainy day fund.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, FHA, VA, USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
Updated on 1-29-21