So you have finally decided that it is time you settled down and are looking to buy a house. Or you have saved for a long time and you are confident that the amount you have can get you a nice house. Or maybe, you are a new couple and you want somewhere upon which to build a home.
You are not alone, many people are looking to own homes. But while buying a house is a good achievement, there are certain considerations that need to be taken into account when you are thinking about how much to spend on a house.
For one, how much do you want to spend on a new house? Secondly, are you buying one or are you building one? Thirdly, where is the house located? Fourthly, what type of house are you looking to buy and how big?
By being able to answer these questions, you will be able to figure out an estimate of how much you may need to part with to own your dream home.
How much money do you need to buy a house?
There are two ways you can buy a house.
One involves buying it in cash. It is rather straightforward and does not require too many formalities. Since all houses cannot be valued the same, there is no way of telling how much you can afford unless you get an estimate or quote.
The second method involves you taking a loan. This method is a little complex and has a number of technicalities which you must handle. It is important to understand that every step you have to take towards owning a house is crucial. Overlooking even the tiniest of details may cost you dearly.
So how much do I need to buy a house?
How much you need to buy a house depends on where the house is located and your budget. For example, the median home value for a house in the US is $200,000. With this amount of money, you can comfortably afford a three-bedroom house in some states in the US. However, what you can afford boils down to how much you earn per year and your monthly debt.
For example, with an annual salary of $40,000, you can afford a house that is up to $150,000 according to Zillow. If you and your partner have a combined gross salary of $80k/year, you can comfortably afford a house of $320,000.
These estimations are determined by a number of factors including your annual income, monthly debt, down payment, interest rate, property tax and home insurance.
Aside from that, you also need to factor into your budget the expenses that come with buying a house. Some common expenses include:
- Earnest fees
- Closing Fees
- Moving fees
These are fees paid as soon as you show interest in a house. Consider it like a deposit. Paying earnest fees shows that you are serious about purchasing the house and usually, the fee is about 1%-3% of the purchasing price.
The money does not go to the seller. Rather, it is held in an escrow and the receipt sent to the seller for confirmation. Once the deal is finalized and you are ready to move into your new house, the money will be released and added to your down payment.
In the event you want to rescind the sale agreement, the earnest fees are given to the seller. If the sale fails to go through the seller overlooked one or two things, the money will be refunded to you.
These are any additional small costs you incur while paying everyone involved in the selling process. Some of these costs include:
- Origination fee – This is a processing fee paid to the lender.
- Discount points – This is pre-paid interest to lower your mortgage rate.
- Owner title insurance – This is insurance paid to protect the lender should there be any problem with the title.
- Credit report – A report showing your credit score and status.
- Title check – This is paid to a title company to ensure that title details are correct.
- Appraisal fee – Paid to help determine the value of the house. Lenders will most likely ask that you do an appraisal and this may cost you anywhere between $ 600-900.
- Pre-paid property tax – you will have to pay 2 months’ worth of taxes upfront.
- Underwriting fees – for underwriting the mortgage.
- Home inspection.
Normally, the closing fee on a house is about 2% – 5% of the purchasing amount. Therefore, if you are buying a house for $200,000, you will pay anything from $4000 to $10,000.
The Closing fee amount is determined by a number of factors including administrative and courier costs; however, these factors vary. Furthermore, the closing varies depending on:
- Whether the lawyer was present
- Municipality fees and other charges. These vary with each state.
Your lender might also add or lower the amount of money you need for the close. They might give you a lower closing rate called the Good Faith Estimate. Alternatively, if the lender is charging a high-interest on the closing fees, you could negotiate with the seller for a lower rate.
You also need Reserve funds. This is money saved in your bank totaling the amount you are supposed to pay every month. These Funds vary from time to time and with different lenders. They also vary depending on your financial situation. Normally, your lender will require that you have two months’ worth of reserve funds in the account.
However, you may be required to have more in the event you have a bad credit rating. The money is supposed to cover you whenever you encounter problems along the way, thus giving you enough time to recover.
For example, if your mortgage costs $3000 per month, your lender might require you to have two months’ worth of that amount saved up, i.e. $6000. All these fees will be added to the down payment.
The down payment usually varies from lender to lender. Normally, down payments range from 3.5% – 20% of the total purchasing price. FHA loans charge 3.5 % and are more popular because most people cannot afford the 20%. You have to remember that your down payment will not come from the loan. It has to come out of your own pocket.
There is no problem in paying 20% of the purchasing price if you have it. In fact, this rate helps to reduce the amount of mortgage you will be required to pay and it will also reduce the interest rate charged by your lender.
Another thing is down payments are not paid in cash. You cannot give a lump sum to your lender. You have to deposit it to an account 2 or 3 months before you close the sale. This will allow the lender to trace your money.
Bank records are important in helping the lenders prove that the money is yours. However, there are instances where you can pay in cash.
These are fees paid when the sale is complete and you are ready to move into your new house. This amount is determined by the amount of stuff you have, distance and other factors. You should be able to decide how much it is going to cost you to move.
All of these rates are out-of-pocket costs. How much you need to save for a house is actually determined by the out-of-pocket costs you are likely to incur. Once you have figured out how much your out-of-pocket costs are going to be, your lender will be able to deduct the rest of the amount from your mortgage rates on a monthly basis.
Buying a house needs proper preparation. There are fees that will not be returned once a mistake happens on your side and it would be unfortunate if the mistakes happened because you were not well prepared.
While it appears as if there is too much to pay, the truth is that whatever you pay out-of-pocket is a percentage of the whole amount. It should not scare you from deciding to own your own home.