Dec 6, 2019
There’s nothing like the feeling of holding the keys to your new house for the first time. It’s a combination of relief, excitement, and pride.
Homeowners will also tell you that it’s worth all the work that comes before that moment, including saving for the actual purchase, which is often the most intimidating step.
Fortunately, it’s a lot easier to save for a house if you understand the five primary costs involved.
If you’re ready to save for a house, don’t assume how much you’ll need. While everyone’s budget is different, effectively saving for a house comes down to covering these five costs.
The down payment for a home will have the greatest impact on how much of a house you can afford. It’s the amount you need to come up with before you can purchase a home, but it’s also one of the biggest factors most lenders will consider before deciding how much of a mortgage to offer you.
Generally speaking, the more you can put down, the better, but there’s no one target you need to save for to secure a loan. While many experts will recommend you try to cover 10-20% of a house’s total with your down payment, an FHA loan only requires about 3% in most cases.
Just know that larger down payments usually come with better terms. Many buyers focus only on the short term when deciding how much they’ll put down. Unfortunately, once that first mortgage payment comes due, they realize how much they’ll be paying every month for 15-20 years.
At the other end of the transaction, we have closing costs, which are the sum total of what’s required to make the sale official.
On average, closing costs are about 2-5% of the total for your mortgage. However, it’s tough to give an estimate for how much you’ll need to save.
For one thing, a large portion of these costs differ by state because of real estate transfer taxes. Different lenders charge different application fees, too. Those may even differ depending on the type of loan you secure.
So, when saving for a house, add at least 2% for your closing costs, but look into the taxes in your state and what potential lenders will charge to get a better idea of what that number really is.
Prepaid expenses sound simple but can be a little confusing.
Most lenders will roll your homeowner’s insurance and real estate taxes into the actual mortgage, which is great because it will save you money upfront and cut the total amount into much more manageable monthly payments.
However, you’ll still need to prepay a certain amount upfront to ensure the lender will have enough to make those payments when they come due.
Again, the exact amount will depend on where you live and your lender, but you could need to prepay 2-12 months worth of real estate taxes. For example, if your taxes will be $200 a month and the lender requires 8 months for escrow, you’ll need another $1,600 before you can close.
This one’s easy.
Like moving to any new place, you will need to set up utilities like power, gas, water, internet and cable. Most of these services require setup fees, so you'll want to budget these into how much you plan to save.
To get an estimate of what you will be paying at the home, you can ask your agent to get a copy of previous utility bills from the seller if the home was preowned.
Finally, lenders don’t want you to take out a mortgage, buy a home, and then become completely broke. It’s hard to imagine that situation wouldn’t end in an immediate default, something the lender wants to avoid at all costs.
As such, they’ll require that you prove you’ll still have a certain amount of cash on reserve. Usually, they’ll want to see enough to cover your first two mortgage payments.
You don’t actually have to put that money in escrow, though. Instead, you just have to show proof that you have the required amount in a checking account, savings account, money market fund – basically, anywhere they’re liquid and, thus, quickly accessible.
As you can see, it may take some time to save for a house given the five costs we just covered.
However, there are actually a few ways you can offset the amount you’ll need to buy your dream home.
Of course, you can do all three options which would save you thousands of dollars when you buy a home. Take your time finding a budget-friendly mortgage that will allow you to meet the seller’s asking price. As a result, they might elect to help you with closing costs especially if repairs need to be made. Then, at closing, get your refund from us.
The only thing better than buying a house is saving money when you do.
Take the time to consider the five costs involved, so you know how much you can spend before you begin house-hunting.
Once that time comes, let us help. We’ll connect you with an experienced real estate agent and hand you over up to$15,000 when you close on the home.
Contact us today and we’ll explain this simple process.