When you reach the phase of your life where you’ve settled on a place you want to live for the next few years, buying your own house gives you financial freedom and peace of mind that’s difficult to attain while living in a rental property. No more stressing over the ever-increasing rent prices or moving houses every so often, searching for the ideal rental!
If you’re reading this article, though, you likely already know the tax benefits of owning a home and have your own motivations for wanting to buy a place to call your own. Like most prospective homebuyers, the question that’s top of mind is: “How much money do I need to buy a house?” Perhaps, you’ve looked up home prices online and found that the average home sale price in the U.S. in January 2022 was $350,300, and it could be even more in your area of the country, making you question if you have enough cash saved up.
However, you shouldn’t fret if you can’t afford to pay for a house upfront in all cash. After all, most American homebuyers — about 87% — finance their house purchase. So, let’s dive into the nitty-gritty of the costs involved in buying a house and put some numbers to the homeownership process.
How Much Should You Put Down for a House?
When you can’t afford to buy a home in cash, getting a mortgage is the most convenient way to realize your homeownership dream. With this option, your main concern is satisfying the minimum down payment and the pertinent credit score required by lenders to qualify for a loan.
Do You Need to Have a 20% Down Payment?
According to a 2021 report from the National Association of Realtors, the average down payment for all buyers was 12%, and it’s even less for first-time homebuyers. This dispels the popular market opinion that you must have a 20% down payment to get a mortgage. All the same, most lenders favor down payments of 20% or more, especially for jumbo loans because it means less risk for them.
Equally, you get better financing terms when putting 20% or more down on a house. These are some of the perks you enjoy:
- Lower monthly mortgage payment rates
- Lower interest rates
- More home equity (What is equity in a house?)
- No private mortgage insurance (PMI) or mortgage insurance premium (MIP)
To gain perspective, let’s crunch the numbers. Say the purchase price of a house is $500,000. If you put a 20% down payment, you’ll pay $100,000, which translates to 20% of the house’s value (meaning you’ll have $100,000 in home equity). In turn, your lender will top up the remaining $400,000, which will be your mortgage principal.
In this case, you’ll need to have saved at least $100,000 to afford the down payment. Even so, $100,000 is still a hefty chunk of change. Even for a house with a lower purchase price, saving a 20% down payment upfront can be a tall ask. Fortunately, there are many types of loans for first-time home buyers, and if you qualify, you can access a no-money-down mortgage or a low-down-payment mortgage.
No Down Payment? No Problem
VA Home Loans
VA loans are backed by the U.S. Department of Veterans Affairs (VA) and packaged for active military service members, Veterans, and bona fide surviving spouses. While there’s no down payment provision for VA loans, borrowers are required to pay an upfront funding fee, which can be blended into the VA loan.
USDA loans are backed by the U.S. Department of Agriculture (USDA) and target borrowers who desire to buy a home in designated rural areas. Like a VA loan, you pay no down payment if you qualify for a USDA loan, but there’s an upfront guarantee fee requirement that can be rolled into your mortgage.
You can pay as little as 3.5% to 3% down payment with low-down-payment loans. These mortgage loan types include:
- Federal Housing Administration (FHA loan): An FHA loan requires a 3% down payment with a credit score of 580 and a 10% down payment with a credit score of 500. The flip side is that you must pay a mortgage insurance premium throughout the life of the loan.
- HomeReady mortgage backed by Federal National Mortgage Association (Fannie Mae) and HomePossible mortgage from the Federal Home Loan Mortgage Corporation (Freddie Mac): these two options offer a 3% down payment. However, you have to pay private mortgage insurance.
- Conventional 97 mortgage from Freddie Mac and Fannie Mae: this program also requires a 3% down payment with a credit score of at least 620. You also have to pay mortgage insurance, and the property has to be a single-unit dwelling.
- Conventional mortgages: They include Piggyback loans without PMI — offering a 10% down payment, and Conventional loans with PMI — offering a 5% down payment.
Since a down payment is the biggest cost you need to satisfy when buying a house, you may conclude that you only need to save enough money to afford a down payment and have a good credit score to qualify for your ideal mortgage. However, you have to also account for the closing costs you’ll need to buy a home.
How Much Are Closing Costs?
When you go to settlement to buy your new house, whether you pay in cash or roll the closing costs into the mortgaged loan amount, you’ll need to pay the following:
- Processing and filing fees
- Title insurance fees and deed transfer tax
- Home inspection and appraisal fees
- Property taxes
- Homeowners insurance
- HOA transfer fee in case your house is in an area controlled by a homeowner’s association (HOA)
These closing costs vary depending on your state. Even so, you should expect to pay anything between 1-6% of the purchase price. That way, if the purchase price of a house is $500,000, then you should have more than $530,000 saved if you’re paying with cash. When financing, you should have about $30,000 in cash saved on top of the required down payment, or you will need to work with your lender on rolling that $30,000 into your loan amount. Be aware that if you roll in the closing costs to your loan amount, it will increase your monthly mortgage payments and could even impact the interest rate you’re offered.
Also, some sellers may require you to pay earnest money upon entering a purchase agreement (typically, the earnest money amounts to 1-2% of the home’s purchase price). More so, you’ll need to consider moving costs and ongoing costs such as your monthly payment on your mortgage and maintenance fees.
So, How Much Is Enough? 10k? 30k?
There’s no magic number or a one-size-fits-all rate for a house budget. It’s ideal to save more than 20% of the property purchase price if you intend to finance your home purchase. Armed with a 20% down payment, you’re just about guaranteed to secure a mortgage loan with favorable terms and conditions, and you’ll avoid private mortgage insurance. Look at it this way. When you can afford a 20% down payment, you’ll be in the clear in case you don’t qualify for a low-down payment or a no-down-payment mortgage.
But if you’re still a long way from having the full 20% saved and you still have your sights set on buying a home, it doesn’t hurt to talk to a lender to discuss your loan options and get pre-qualified. That way, you’ll know what your ideal budget should be while you continue to save. Plus, you’ll be prepared to make an offer sooner if your dream house goes on the market in the meantime. And since the average down payment is just 12%- and in the single digits for younger homebuyers- it’s very common to buy before you have more than 20% saved.
Setting Your Budget
Ideally, you should avoid wiping out all your savings or net worth to afford a down payment or committing over 28% of your gross monthly income to mortgage payments. Also, as a rule of thumb, you should never deplete your emergency fund — a mistake many first-time homebuyers are often guilty of. You should draw up a budget that preserves your current and future cash reserves, and consider what your monthly cash flow will be, including your new mortgage payments, maintenance costs, home insurance, property taxes, HOA fees, plus any existing debt you already have.
Once you have set your budget, the hard work begins — finding the best deal in a competitive real estate market. When buying your first house, you’ll be better off working with a first-time home buyer real estate agent to help you get a house that suits your taste and also recommend a mortgage lender who can pre-approve your mortgage without extended delays.
How Dwellful Can Help
It can be hard to find a buyer’s agent you can trust, especially when it’s your first time buying a house. But with Dwellful, you can connect with a qualified, local real estate agent in just minutes with no commitment and zero cost to you. Our free online agent finder tool uses data-driven matching technology to scan a national database of thousands of real estate agents and match you with a top-performing agent within your local area. This way, you get an agent who’ll be more effective in your house purchase process.